-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ngcTQI9tVtcKBAxc5w/i4roSZ2VwRemnaY0iM20Z2cZga58upimvxbMGSdLGOHLk B3+0cRmxpknbXHSigZD3Bw== 0000950131-94-001230.txt : 19940802 0000950131-94-001230.hdr.sgml : 19940802 ACCESSION NUMBER: 0000950131-94-001230 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19940801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONTGOMERY WARD HOLDING CORP CENTRAL INDEX KEY: 0000836974 STANDARD INDUSTRIAL CLASSIFICATION: 5311 IRS NUMBER: 363571585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 033-33252 FILM NUMBER: 94541005 BUSINESS ADDRESS: STREET 1: ONE MONTGOMERY WARD PLZ CITY: CHICAGO STATE: IL ZIP: 60671 BUSINESS PHONE: 3124672000 POS AM 1 P.E. AMEND. NO. 6 TO S-1 As filed with the Securities and Exchange Commission on August 1, 1994 REGISTRATION NO. 33-33252 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- POST-EFFECTIVE AMENDMENT NO. 6 To Form S-l Registration Statement Under The Securities Act Of 1933 ---------------- MONTGOMERY WARD HOLDING CORP. (Exact name of registrant as specified in its charter) 5300 DELAWARE 36-3571585 (Primary Standard (State or other (I.R.S. Employer Industrial jurisdiction Identification No.) Classification Code of incorporation or Number) organization) Montgomery Ward Plaza Chicago, Illinois 60671-0042 (312) 467-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- Spencer H. Heine, Esq. Executive Vice President, Secretary and General Counsel Montgomery Ward Holding Corp. Montgomery Ward Plaza Chicago, Illinois 60671-0042 (312) 467-2000 (Name and address, including zip code, and telephone number, including area code, of agent for service) Copies to: John E. Lowe, Esq. Altheimer & Gray 10 South Wacker Drive Suite 4000 Chicago, Illinois 60606 (312) 715-4020 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MONTGOMERY WARD HOLDING CORP. REGISTRATION STATEMENT ON FORM S-1 Cross Reference Sheet Furnished Pursuant to Item 501(b) of Regulation S-K Showing the Location in the Prospectus of the Information Required by Part 1 of Form S-l.
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS -------------------------- ---------------------- 1. Forepart of the Forepart of the Registration Statement and Registration Statement and Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus............. 2. Inside Front and Outside Inside Front and Outside Back Cover Pages of Back Cover Pages of Prospectus; Available Information Prospectus................ 3. Summary Information, Risk Prospectus Summary; Summary Financial Factors and Ratio of Information; The Company; Risk Factors; Earnings to Fixed Charges. Selected Financial Data 4. Use of Proceeds .......... Use of Proceeds 5. Determination of Offering Outside Front Cover Page of Prospectus; Price..................... Determination of Offering Price 6. Dilution.................. Not Applicable 7. Selling Security Holders.. Selling Shareholders 8. Plan of Distribution...... Outside Front Cover Page of Prospectus; Plan of Distribution 9. Description of Securities Description of Equity Securities to be Registered.......... 10. Interests of Named Experts Experts; Legal Opinions and Counsel............... 11. Information with Respect Outside Front Cover Page of Prospectus; to the Registrant......... Prospectus Summary; The Company; Risk Factors; Use of Proceeds; Dividends; The Voting Trust Agreement; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Properties; Management; Principal Shareholders; Description of Equity Securities; Index to Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............... Not Applicable
PROSPECTUS MONTGOMERY WARD HOLDING CORP. 3,000,000 SHARES CLASS A COMMON STOCK, SERIES 1 ($.01 PAR VALUE) AND VOTING TRUST CERTIFICATES REPRESENTING 3,000,000 SHARES CLASS A COMMON STOCK, SERIES 1 ($.01 PAR VALUE) ---------------- This Prospectus covers 3,000,000 shares of Class A Common Stock, Series 1, par value $.01 per share, of Montgomery Ward Holding Corp., a Delaware corporation (the "Company"), and voting trust certificates ("Voting Trust Certificates") issued in exchange therefor, to be sold by holders of such shares pursuant to the Stockholders' Agreement, dated as of June 17, 1988, as amended from time to time (the "Stockholders' Agreement"), or pursuant to the Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions (the "Terms and Conditions"), which contain substantially similar provisions as the Stockholders' Agreement with respect to the purchase of such shares from such holders, to Designated Management Optionees (as defined herein) designated pursuant to the terms of the Stockholders' Agreement or the Terms and Conditions or to persons designated pursuant to agreements with the Committee (as defined herein) requiring sales in substantially the same manner; or to be sold by the Company or Bernard F. Brennan ("Brennan") after purchase by the Company or Brennan of such shares upon exercise of options under the Stockholders Agreement or the Terms and Conditions or in consensual transactions upon terms similar to such options. A copy of the Stockholders' Agreement as in effect on the date hereof, including certain amendments contemplated as of the date hereof, is attached hereto as Annex 1. The shares of Class A Common Stock, without regard to series, and Voting Trust Certificates issued in exchange therefor are collectively referred to herein as the "Shares" except where the context otherwise requires. Shares acquired by the holder thereof pursuant to awards ("Awards"), options ("Options") and purchase rights ("Purchase Rights") under the Montgomery Ward & Co., Incorporated Stock Ownership Plan (the "Stock Ownership Plan") and such Shares held by certain permitted transferees of such acquiror, are collectively referred to herein as "Plan Shares." The Company will receive no proceeds from the sale of Shares by holders thereof. The Company is the issuer of the Shares. The Voting Trustee ("Voting Trustee") under the Voting Trust Agreement, dated as of June 21, 1988 ("Voting Trust Agreement"), a copy of which is attached hereto as Annex 2, is the issuer of the Voting Trust Certificates. See "THE VOTING TRUST AGREEMENT." INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. THERE IS NO PUBLIC MARKET FOR THE SHARES OR ANY OTHER EQUITY SECURITY OF THE COMPANY. SHOULD A PUBLIC MARKET DEVELOP, THE SHARES COULD TRADE AT A PRICE SUBSTANTIALLY LESS THAN THE PURCHASE PRICE PAID HEREUNDER. PURCHASERS OF SHARES HEREUNDER (THE "PURCHASERS") WILL PURCHASE SUCH SHARES SUBJECT TO THE TERMS OF THE STOCKHOLDERS' AGREEMENT AND WILL BE REQUIRED TO EXECUTE AN AGREEMENT TO JOIN AS PARTIES TO THE STOCKHOLDERS' AGREEMENT, IF THEY ARE NOT ALREADY PARTIES, OR TO SIGN AN INSTRUMENT ACKNOWLEDGING THAT THE SHARES PURCHASED HEREUNDER ARE SUBJECT TO (Cover continued on following page) THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (Cover continued from previous page) THE STOCKHOLDERS' AGREEMENT. THE STOCKHOLDERS' AGREEMENT INCLUDES SIGNIFICANT RESTRICTIONS ON TRANSFER AND RIGHTS OF REFUSAL WITH RESPECT TO TRANSFERS OTHER THAN TO CERTAIN "PERMITTED TRANSFEREES". THE STOCKHOLDERS' AGREEMENT ALSO INCLUDES AN AGREEMENT TO GIVE A COMMITTEE OF THREE MANAGEMENT SHAREHOLDERS (THE "COMMITTEE"), INCLUDING BRENNAN AS A MEMBER THEREOF, THE RIGHT TO DESIGNATE CERTAIN PERSONS (THE "DESIGNATED MANAGEMENT OPTIONEES") TO REPURCHASE THE SHARES IN CERTAIN INSTANCES. THE DESIGNATED MANAGEMENT OPTIONEES MAY INCLUDE A MEMBER OF THE COMMITTEE (OR A MEMBER OF HIS FAMILY) UPON THE AFFIRMATIVE VOTE OF ALL OTHER MEMBERS OF THE COMMITTEE. THE COMPANY WILL ALSO HAVE A RIGHT TO REPURCHASE THE SHARES IN CERTAIN CIRCUMSTANCES. THE PRICE FOR PURCHASES OF SHARES WHICH HAVE NOT BECOME VESTED IN ACCORDANCE WITH THE STOCKHOLDERS' AGREEMENT ("NON-VESTED SHARES") WILL GENERALLY BE THE PRICE PAID FOR SUCH SHARES BY THE PURCHASER UPON ISSUANCE OR RESALE BY THE COMPANY, WHICH IS GENERALLY $.20 PER SHARE, AND THE PRICE FOR PURCHASES OF SHARES WHICH HAVE BECOME SO VESTED ("VESTED SHARES") WILL GENERALLY BE THE FAIR MARKET VALUE THEREOF DETERMINED IN ACCORDANCE WITH THE STOCKHOLDERS' AGREEMENT. SEE "THE STOCKHOLDERS' AGREEMENT." ACCORDINGLY, UNDER CERTAIN CIRCUMSTANCES, PURCHASERS COULD BE REQUIRED TO SELL THEIR SHARES TO DESIGNATED MANAGEMENT OPTIONEES OR TO THE COMPANY AT PRICES THAT ARE SUBSTANTIALLY BELOW THE FAIR MARKET VALUE FOR SUCH SHARES. PURCHASERS WILL GENERALLY BE PURCHASING SHARES OF CLASS A COMMON STOCK WHICH WERE PREVIOUSLY REQUIRED TO BE DEPOSITED IN THE VOTING TRUST (THE "VOTING TRUST") CREATED BY THE VOTING TRUST AGREEMENT AND WHICH WILL CONTINUE TO BE HELD IN THE VOTING TRUST FOLLOWING SUCH PURCHASE. THUS, PURCHASERS WILL BE PURCHASING THE BENEFICIAL INTEREST IN SHARES WHICH ARE HELD OF RECORD BY THE VOTING TRUSTEE AS TRUSTEE. UNDER THE VOTING TRUST AGREEMENT, BRENNAN, OR HIS SUCCESSOR, AS VOTING TRUSTEE, HAS FULL AND EXCLUSIVE POWER TO VOTE THE SHARES. SEE "THE VOTING TRUST AGREEMENT." THE PURCHASE OF SHARES IS SUITABLE ONLY FOR PERSONS WHO HAVE NO NEED FOR LIQUIDITY WITH RESPECT TO THEIR INVESTMENT. THE DATE OF THIS PROSPECTUS IS AUGUST 1, 1994 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). The Company has filed with the Commission a registration statement under the Securities Act of 1933, as amended, (the "Act") with respect to the Shares and the Voting Trust Certificates representing such Shares being offered hereby (the "Registration Statement"). This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the Commission under the Act. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference should be made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of any and all of the information that has been incorporated by reference in this Prospectus (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates) is available without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person to Spencer H. Heine, Esq., Executive Vice President, Secretary and General Counsel, Montgomery Ward Holding Corp., Montgomery Ward Plaza, Chicago, Illinois 60671, Telephone No. (312) 467-2000. Items of information omitted from this Prospectus but contained in the Registration Statement and the proxy statements, reports and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following regional offices of the Commission: Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained by mail upon written request from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549 at prescribed rates. 3 PROSPECTUS SUMMARY The following summary is intended only to highlight certain information contained elsewhere in this Prospectus and is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. THE COMPANY The Company through its subsidiary Montgomery Ward & Co., Incorporated, an Illinois corporation ("Montgomery Ward"), is one of the nation's largest retail merchandising organizations. Montgomery Ward conducts its merchandising operations through its Montgomery Ward and Lechmere stores. Montgomery Ward, which operated 366 stores as of April 2, 1994, offers a broad range of quality national brands and proprietary brands as well as its own private label goods in the areas of apparel including jewelry, electronics, automotive, appliances and home furnishings. On March 30, 1994, Montgomery Ward acquired all of the outstanding stock of LMR Acquisition Corporation ("LMR"), which owns 100% of the stock of Lechmere, Inc. ("Lechmere"). As of that date, Lechmere operated 24 high volume stores in the northeast United States. Lechmere stores carry a broad range of quality name brand products in the following categories: consumer electronics, home office and entertainment software, appliances, housewares, photography, and recreation and leisure. The Company also offers life and health insurance, revolving credit insurance, club products and other consumer services through Montgomery Ward's subsidiary, Signature Financial/Marketing, Inc., a Delaware corporation ("Signature"), and through Signature's subsidiaries (collectively with Signature, the "Signature Group"). See "THE COMPANY," "SELECTED FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" and "PROPERTIES." RISK FACTORS The purchase of Shares involves a high degree of risk. See "RISK FACTORS." THE OFFERING SECURITIES OFFERED 3,000,000 shares of Class A Common Stock, Series 1, par value $.01 per share, and Voting Trust Certificates representing beneficial ownership of such 3,000,000 shares of Class A Common Stock, Series 1. As of July 2, 1994, 2,673,700 shares of Class A Common Stock, Series 1 have been transferred pursuant to this Registration Statement. See "THE VOTING TRUST AGREEMENT" and "DE- SCRIPTION OF EQUITY SECURITIES." USE OF PROCEEDS The Company will receive no proceeds from the sale of Shares by holders of Shares. Cash proceeds from the sale of Shares by the Company will be used for general corporate purposes. The purpose of this registration is to facilitate the transfer of Shares among current and former employees (employees are hereinafter referred to as "associates") of the Company and certain other hold- ers that may be designated pursuant to the Stockhold- ers' Agreement and to permit certain other sales on substantially similar terms. See "PLAN OF DISTRIBU- TION." 4 RESTRICTIONS ON TRANSFER OF SHARES, All Purchasers will purchase the Shares subject to sig- RIGHTS OF REFUSAL AND nificant restrictions on the transfer of Shares, rights REPURCHASE RIGHTS of refusal in the event of certain proposed transfers and certain obligations or options to sell the Shares as stated in the Stockholders' Agreement. A copy of the Stockholders' Agreement, as in effect on the date here- of, with certain amendments thereto contemplated as of the date hereof, is attached as Annex 1 hereto. See "THE STOCKHOLDERS' AGREEMENT." Plan Shares owned by Purchasers who are or become subject to the Stockhold- ers' Agreement will also be covered by the Stockhold- ers' Agreement, except as provided otherwise in the no- tice of grant under the Stock Ownership Plan provided to a particular Purchaser. Plan Shares which are not subject to the Stockholders' Agreement are subject to the Terms and Conditions. Although the descriptions set forth herein of the treatment of Shares pursuant to the Stockholders' Agreement are not applicable to such Plan Shares, the Terms and Conditions and the Stockholders' Agreement contain terms substantially similar to each other with respect to the subject of this discussion. The descriptions of the treatment of Plan Shares herein refer to Plan Shares subject to the Stockholders' Agreement, unless otherwise indicated. In the event of the death, total permanent disability or termination of employment of a Purchaser with the Company, Montgomery Ward and its subsidiaries (collec- tively, the "Ward Group") for any reason, the Desig- nated Management Optionees and the Company will have the option to purchase (a "call option") the Shares of such Purchaser and persons who constitute his or her Permitted Transferees under the Stockholders' Agree- ment. In the event of the death or total permanent dis- ability of a Purchaser while such Purchaser is an asso- ciate of the Ward Group, that Purchaser or his or her personal representative or Permitted Transferees, also will have the option to sell his or her Shares (a "put option"); such Shares shall be purchased by any Desig- nated Management Optionees to the extent any such Des- ignated Management Optionees exercise an option to make such purchases and by the Company to the extent they do not. To the extent the put option is not exercised, any Designated Management Optionees and the Company will have an option to purchase those Shares. In the event of the death of a Purchaser after termination of his or her employment with the Ward Group, any Designated Man- agement Optionees and the Company will also have a call option on any such Shares not previously purchased. The put option described above will terminate if and when the Public Offering Termination Date occurs. The "Pub- lic Offering Termination Date" is defined as the date when, and if, as a result of the sale or issuance of shares of common stock of the Company pursuant to one or more registration statements under the Act (other than pursuant to the Stock Ownership Plan or this Reg- istration Statement) and under Rule 144 promulgated by the Commission under the Act, 25% or more of the out- standing shares of the voting stock of the Company con- sists of shares which have been so issued or sold. Under the Stockholders' Agreement, all Shares are ei- ther vested or non-vested. Purchasers of Shares offered hereby will be "Management Shareholders" (as defined in the Stockholders' Agreement). The Stockholders' Agree- ment classifies all Management Shareholders as either Type 1 Man 5 agement Shareholders ("Type 1 Management Shareholders") or Type 2 Management Shareholders ("Type 2 Management Shareholders"). All Shares owned by a Type 1 Management Shareholder are Vested Shares. All Shares owned by a Type 2 Management Shareholder vest as described below. It is currently anticipated that Brennan, outside di- rectors and holders who may receive shares in connec- tion with the purchase by Montgomery Ward of Lechmere will be the only Type 1 Management Shareholders, al- though others may become Type 1 Management Sharehold- ers. It is currently anticipated that all other Manage- ment Shareholders, including all of the Purchasers of Shares in the offering made hereby, will be Type 2 Man- agement Shareholders. All Vested Shares purchased by a Designated Management Optionee shall continue to be Vested Shares in the hands of such Purchaser. All Non-Vested Shares purchased by a Designated Manage- ment Optionee, who was not a shareholder prior to such purchase, will be Non-Vested Shares as of the date of such purchase and will become Vested Shares as de- scribed below. Non-Vested Shares purchased by a Desig- nated Management Optionee, who was a shareholder prior to such purchase, will also become Vested Shares as de- scribed below. Except to the extent a vesting schedule is accelerated by the Designator (as defined below), at its discretion, generally, 20% of all Non-Vested Shares (which are not Plan Shares) held or acquired by a Des- ignated Management Optionee will be treated as Vested Shares as of, and become Vested Shares on, each of the first five anniversaries of the date of the earliest acquisition of any shares by such Designated Management Optionee. Generally, the vesting period for Plan Shares received pursuant to an Award and Plan Shares purchased upon the exercise of a Purchase Right begins with the date of the grant of the Award or the exercise of the Purchase Right, respectively. The vesting period for Plan Shares purchased upon the exercise of an Option begins with the date of the grant of such Option, but no such Plan Shares shall be vested prior to purchase. Subject to the limitations stated with respect to Plan Shares subject to an Option in the preceding sentence, 20% of the Plan Shares with respect to a given Award, Purchase Right or Option will vest on each of the first five anniversaries of the beginning of the applicable vesting period with respect thereto, provided that, un- less otherwise determined in writing by the Designator, Plan Shares subject to purchase upon exercise of an Op- tion become Vested Shares upon such purchase. All Non-Vested Shares (including Plan Shares) will be- come Vested Shares on the Public Offering Termination Date, other than for purposes of the call options which arise upon death following termination of employment. All Non-Vested Shares (including Plan Shares) of a Type 2 Management Shareholder who shall have died or become totally permanently disabled while an associate of the Ward Group shall become Vested Shares as of the date of such death or disability. A substantial portion of the Outstanding Shares became Vested Shares on or before June 23, 1993. If a Purchaser's employment with the Ward Group is terminated for Cause (as defined herein), his or her shares, including Plan Shares but excluding Shares that were Vested Shares in the hands of any per- son who transferred such Shares to such terminated as- sociate, will be treated as Non-Vested Shares. 6 The description of the treatment of Plan Shares above refers to Plan Shares subject to the Stockholders' Agreement. The treatment of Plan Shares subject to the Terms and Conditions is substantially similar. The purchase price for any Shares purchased by a Desig- nated Management Optionee or the Company pursuant to the Stockholders' Agreement is (a) the Fair Market Value (as defined below) for all Vested Shares and (b) for Non-Vested Shares, the lower of the Fair Market Value of such Shares or the price which was paid to the Company upon the issuance or reissuance of such Shares. Such Fair Market Value will be calculated on a fully- diluted basis and will be based on the fair market value of the Company's consolidated common equity de- termined annually by the Board of Directors of the Com- pany ("Board of Directors") (as of the beginning of the fiscal year in which such determination occurs), as thereafter periodically adjusted as described below. The fair market value of the common equity as so deter- mined by the Board of Directors will be adjusted by adding: (i) an amount equal to the Fair Market Value at the date of grant for the shares of Class A Common Stock underlying all outstanding and unexpired Options, Purchase Rights or other options or rights to acquire shares of Common Stock (as defined below); (ii) the amount of cash and other consideration (including any difference between the Fair Market Value at the date of grant and the exercise price) received or receivable by the Company during the then-current fiscal year on account of the exercise of any Options, Purchase Rights, or other options or rights to acquire shares of Common Stock; and (iii) the aggregate consideration received by the Company for shares of Common Stock issued in the then-current fiscal year not accounted for in either (i) or (ii) above; and by subtracting: (i) the aggregate amount of dividends paid or payable on Common Stock in the then-current fiscal year; and (ii) the aggregate amount paid by the Company to redeem, repurchase or otherwise acquire for consideration shares of Common Stock during the then-current fiscal year. Based upon the calculation of the fair market value of the common equity as set forth above, the fair market value per share of Class A Common Stock ("Fair Market Value"), taking into account all outstanding Options and allocating dilution therefrom between the holders of the Class A Common Stock, $.01 par value (without regard to series) (the "Class A Common Stock"), and the Class B Common Stock, $.01 par value (the "Class B Com- mon Stock"), as set forth in the Stockholders' Agree- ment, will be calculated on the date as specified in the Stockholders' Agreement; provided, however, that no adjustment to the Fair Market Value as calculated as of the first day of the then-current fiscal year will be required unless such adjustment would result in an in- crease or a decrease of at least 1% from the amount as so determined as of the beginning of the then-current fiscal year. 7 THE DESIGNATOR AND THE COMMITTEE Under the Stockholders' Agreement, a person or the Com- mittee (collectively, the "Designator") has the right, among other rights, to designate the Designated Manage- ment Optionees. Prior to the occurrence of an Event (as defined below), for all purposes other than designating (and in connection with the designation of) Designated Management Optionees, the Designator is Brennan. At all times for purposes of (and in connection with) the des- ignation of Designated Management Optionees, and from and after the occurrence of an Event for all purposes (including, without limitation, the designation (and in connection with the designation) of Designated Manage- ment Optionees), the Designator is the Committee which is made up of three shareholders. The Committee, except as provided below, will be comprised of Brennan, Edwin G. Pohlmann ("Pohlmann") and Myron Lieberman ("Lieber- man"). Brennan is currently Chairman and Chief Execu- tive Officer and a director of the Company, Pohlmann is currently Executive Vice President of the Company and Lieberman is currently a director of the Company. Prior to the occurrence of an Event, if any member of the Committee resigns from the Committee or ceases to be a Qualified Management Shareholder (as defined below), then such person will cease to be a member of the Com- mittee and the remaining members of the Committee will, as soon as practicable, appoint a Qualified Management Shareholder as a member of the Committee and thereby fill the vacancy on the Committee so created. From and after the occurrence of an Event, the Committee will be comprised of Spencer H. Heine ("Heine") (currently Ex- ecutive Vice President, Secretary and General Counsel and a director of the Company), Pohlmann and Lieberman (each of Heine, Pohlmann and Lieberman being a "Contin- uing Member" and collectively being the "Continuing Members") so long as each is a Qualified Management Shareholder. As the Continuing Members cease to be Qualified Management Shareholders or resign from the Committee, they will generally be replaced on the Com- mittee first by the Management Shareholder owning the largest number of Shares, second by the Management Shareholder owning the second largest number of Shares and third by the Management Shareholder owning the third largest number of Shares, in each case from time to time. In all cases, the Committee will act by the vote of a majority of its members; provided, however, that nei- ther a member of the Committee nor a member of his Fam- ily (as defined in the Stockholders Agreement) may be designated as a Designated Management Optionee except upon the affirmative vote of all other members of the Committee. A "Qualified Management Shareholder" is each of Lieber- man and any other person who is a Management Share- holder and employed by a member of the Ward Group. A person will cease to be a Qualified Management Share- holder if he or she (i) ceases to be a Management Shareholder, (ii) dies, (iii) is adjudicated incompe- tent, (iv) in the case of Lieberman, ceases to be a di- rector of the Company or (v) in the case of any Manage- ment Shareholder other than Lieberman, ceases to be em- ployed by one or more members of the Ward Group so that thereafter no member of the Ward Group employs such Management Shareholder. 8 An "Event" means that Brennan has either resigned from the Committee or ceased to be a Qualified Management Shareholder. AUTHORIZED STOCK As of July 2, 1994, the Company had authorized 25,000,000 shares of Class A Common Stock, Series 1, par value $0.01 per share ("Class A Common Stock, Se- ries 1"), of which 19,326,202 shares were outstanding, and 5,412,000 shares of Class A Common Stock, Series 2, par value $0.01 per share ("Class A Common Stock, Se- ries 2"), of which 150,104 shares were outstanding. All Management Shareholders who have purchased Shares and persons who have purchased or been awarded Plan Shares, other than Brennan and a trust for the benefit of mem- bers of his family, have exchanged such Class A Common Stock for Voting Trust Certificates. The Company has authorized, but not outstanding, 400,000 shares of Class A Common Stock, Series 3, par value $0.01 per share ("Class A Common Stock, Series 3"). The Company also currently has outstanding 25,000,000 shares of Class B Common Stock, par value $0.01 per share, and 750 shares of Senior Preferred Stock with a liquidation value of $100,000 per share (the "Senior Preferred Stock"), all of which are owned by General Electric Capital Corporation, a New York corporation ("GE Capi- tal"). See "DESCRIPTION OF EQUITY SECURITIES" and "PRINCIPAL SHAREHOLDERS." The Class A Common Stock and the Class B Common Stock are collectively referred to as "Common Stock". As of July 2, 1994, there were out- standing but unexercised options to purchase 800,000 shares of Class A Common Stock, Series 1 and 4,676,142 shares of Class A Common Stock, Series 2. VOTING RIGHTS Each share of Class B Common Stock entitles the holder thereof to one vote. Each share of Class A Common Stock entitles the holder thereof to one vote so long as the number of outstanding shares of Class A Common Stock, irrespective of series (the "Outstanding Amount"), is less than or equal to 25,000,000. So long as the Out- standing Amount is greater than 25,000,000, each share of Class A Common Stock, irrespective of series, will entitle the holder thereof to a fraction of a vote per share, the numerator of which is 25,000,000 and the de- nominator of which is the Outstanding Amount. The Out- standing Amount as of July 2, 1994 was 19,476,306. See "DESCRIPTION OF EQUITY SECURITIES--Common Stock--Voting Rights." However, the Shares purchased by Purchasers will be voted by the Voting Trustee (currently, Brennan) during the term of the Voting Trust unless such Shares are released from the Voting Trust by the Voting Trustee in his sole discretion. In addition, Purchasers will be required to agree to vote any Shares released from the Voting Trust in the same manner as Brennan votes his shares of Common Stock until June 17, 1998. See "THE VOTING TRUST AGREEMENT" and "THE STOCKHOLDERS' AGREEMENT." Under certain circumstances, holders of Senior Preferred Stock may have the right to elect one director to the Board of Directors of the Company. See "DESCRIPTION OF EQUITY SECURITIES--Senior Preferred Stock." VOTING TRUST Purchasers will be purchasing beneficial interests in Shares deposited in the Voting Trust which will expire June 21, 1998 in accordance with the terms 9 of the Voting Trust Agreement. Currently, Brennan is the Voting Trustee of the Voting Trust. EXCEPT IN VERY LIMITED CIRCUMSTANCES, THE VOTING TRUSTEE HAS SOLE VOT- ING POWER AND CONTROL OVER ALL MATTERS ON WHICH SUCH HOLDERS OF THE SHARES ARE ENTITLED TO VOTE OR CONSENT WITH RESPECT TO THE SHARES DEPOSITED IN THE VOTING TRUST. See "THE VOTING TRUST." DIVIDENDS If and when declared by the Board of Directors of the Company (the "Board of Directors"), after payment in full of dividends with respect to Senior Preferred Stock of the Company then outstanding, including any arrearages thereon, the aggregate amount of dividends (other than stock dividends) payable to holders of Com- mon Stock, without distinction as to class or series, shall be allocated among the classes and series of Com- mon Stock, as follows: (i) If the Outstanding Amount is less than or equal to 25,000,000, then such dividends are payable to holders of Class A Common Stock in proportion to their respective holdings of shares of Common Stock, without distinction as to class or series; (ii) If the Outstanding Amount is greater than 25,000,000, but the Outstanding Amount less the number of shares of Class A Common Stock, Series 3 outstanding (the "Non-Series 3 Outstanding Amount") is less than or equal to 25,000,000 then such dividends shall be payable to the holders of Class A Common Stock as follows: (A) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series shall be the product of: (x) the aggregate amount of such dividends which would have been paid to such holders if the Outstanding Amount were equal to 25,000,000 multiplied by (y) a fraction, the numerator of which is the Outstanding Amount and the denominator of which is the sum of 25,000,000 plus 50% of the amount by which the Outstanding Amount exceeds 25,000,000; and (B) Such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; (iii) If the Outstanding Amount is greater than 25,000,000 and the Non-Series 3 Outstanding Amount is greater than 25,000,000, then such dividends shall be payable to the holders of Class A Common Stock as follows: (A) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series shall be the product of: (x) the aggregate amount of such dividends which would have been paid to such holders if the Outstanding Amount were equal to 25,000,000; multiplied by 10 (y) a fraction, the numerator of which is the Non-Series 3 Outstanding Amount and the denominator of which is the sum of 25,000,000 plus 81.5% of the amount by which the Non-Series 3 Outstanding Amount exceeds 25,000,000; and multiplied by (z) a fraction, the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Non-Series 3 Outstanding Amount plus 50% of the number of shares of Class A Common Stock, Series 3, outstanding on the date of determination; and (B) Such portion of such dividends which is payable to the holders the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; and (iv) The portion of such dividends which is payable to the holders of Class B Common Stock, as a class, shall be the remainder of the total amount of such dividends after payment to the holders of Class A Common Stock in accordance with paragraph (i), (ii) or (iii) above, as applicable; and such portion of such dividends which is payable to the holders of the Class B Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class B Common Stock. Agreements governing indebtedness for borrowed money of Montgomery Ward contain limitations on the ability of Montgomery Ward to pay dividends or make other distri- butions to the Company. Such limitations will have the effect of restricting the ability of the Company to pay dividends on its Common Stock. See "DESCRIPTION OF EQ- UITY SECURITIES" and "RISK FACTORS--Financing Restric- tions and Dividend Payment Restrictions." LIQUIDATION Upon a liquidation, dissolution or winding up of the Company, subject to prior rights of creditors and hold- ers of any Senior Preferred Stock of the Company then outstanding, the holders of Common Stock will be enti- tled to receive any assets remaining available for dis- tribution to stockholders in the same proportions as those in which they are entitled to receive dividends. CERTAIN FEDERAL INCOME TAX ASPECTS The purchase of Shares hereunder by an associate or prospective associate of the Ward Group is subject to special rules concerning the transfer of property to any person in connection with the performance of serv- ices by such person and may result in compensation be- ing includable in the Purchaser's gross income for fed- eral income tax purposes. The amount and timing of such compensation income, if any, may be dependent in part on whether the Purchaser, within 30 days after purchas- ing Shares, files with the Internal Revenue Service an election to be taxed currently with respect to such purchase under section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"). See "CERTAIN FEDERAL INCOME TAX ASPECTS." 11 NONCOMPETITION AGREEMENT The Stockholders' Agreement contains a general non-com- petition restrictive covenant. The Stockholders' Agree- ment provides that the noncompetition agreement shall not apply to any person who, (i) if their initial pur- chase of Shares occurred on or prior to June 15, 1991, at no time owned 5,000 or more Shares, or (ii) if their initial purchase of Shares occurred after June 15, 1991, at no time owned 25,000 or more Shares. Brennan's noncompetition agreement expired on June 23, 1993. For purposes of the foregoing calculations, Plan Shares, whether or not subject to the Stockholders' Agreement, are included. 12 SUMMARY FINANCIAL INFORMATION The following is a summary of certain financial information relating to the Company as of and for each of the five fiscal years in the period ended January 1, 1994 and for the thirteen-week periods ended April 3, 1993 and April 2, 1994. It has been derived from the Consolidated Financial Statements of the Company. Such information for each fiscal year should be read in conjunction with the Consolidated Financial Statements and notes thereto and the reports of Arthur Andersen & Co. appearing elsewhere in this Prospectus. The summary data for the thirteen-week periods are unaudited and include, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for such periods. Certain prior period amounts have been reclassified to be comparable with current period presentation. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements and notes thereto (including the Notes to Consolidated Condensed Financial Statements) included elsewhere in this Prospectus.
AS OF AND FOR THE -------------------------------------------------------------------------- 13-WEEK PERIOD 52-WEEK PERIOD ENDED ENDED -------------------------- ----------------- 53-WEEK 52-WEEK DEC. 30, DEC. 29, DEC. 28, PERIOD ENDED PERIOD ENDED APRIL 3, APRIL 2, 1989 1990 1991 JAN. 2, 1993 JAN. 1, 1994 1993 1994 -------- -------- -------- ------------ ------------ -------- -------- (UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Total Revenues.......... $5,461 $5,584 $5,654 $5,781 $6,002 $1,248 $1,318 Net Income(a)........... 151 153 135 100 101 10 10 Net Income Applicable to Common Shareholders(a). 138 140 122 92 101 10 10 Net Income per Class A Common Share(a)........ 2.71 2.79 2.40 2.01 2.29 .21 .23 Total Assets............ 3,837 3,906 3,948 3,485 3,835 3,533 4,167 Short-Term Borrowings... -- -- -- -- -- 228 367 Long-Term Debt.......... 729 651 521 125 213 222 402 Obligations Under Capi- tal Leases............. 119 111 104 95 89 94 87 Redeemable Preferred Stock.................. 90 90 90 -- -- -- -- Total Shareholders' Eq- uity................... 287 421 520 553 607 562 626 Cash Dividends per Common Share........... -- -- -- .25 .50 -- --
- -------- (a) Amounts for the 53-week period ended January 2, 1993 are presented before cumulative effect of changes in accounting principles. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of the significant impact of these changes. 13 THE COMPANY The Company is a Delaware corporation which was formed in February, 1988, under the name "BFB Acquisition Corp.", solely for the purpose of acquiring Montgomery Ward from Marcor Inc., a Delaware corporation ("Marcor"), a wholly- owned subsidiary of Mobil Corporation, a Delaware corporation ("Mobil"). The acquisition of Montgomery Ward by the Company (the "Acquisition") was consummated (the "Closing") on June 23, 1988 (the "Closing Date"). The Company's financial condition during the foreseeable future will be entirely dependent upon the results of operations of Montgomery Ward and Montgomery Ward's subsidiaries. Founded in 1872, Montgomery Ward is one of the nation's largest retail merchandising organizations. As of January 1, 1994, Montgomery Ward operated 364 retail stores in 39 states with approximately 28 million square feet of selling space. In addition, Montgomery Ward operated 17 liquidation centers which sell overstock merchandise, 21 distribution facilities and 117 product service centers. See "BUSINESS" and "PROPERTIES." During the 52-week period ended January 1, 1994, Montgomery Ward had consolidated net sales of approximately $5.6 billion and had the equivalent of approximately 51,350 full-time associates. Montgomery Ward offers a broad range of quality national brands and proprietary brands as well as its own private label goods in the areas of apparel including jewelry, electronics, automotive, appliances and home furnishings. Montgomery Ward's retail business is seasonal, with one-third of the sales traditionally occurring in the fourth quarter. See "SELECTED FINANCIAL DATA" and "BUSINESS." On March 30, 1994, Montgomery Ward acquired all of the outstanding stock of LMR, which owns 100% of the stock of Lechmere. As of that date, Lechmere operated 24 high volume stores in the northeast United States. Lechmere stores carry a broad range of quality name brand products in the following categories: consumer electronics, home office and entertainment software, appliances, housewares, photography, and recreation and leisure. Montgomery Ward offers life and health insurance, revolving credit insurance, club products and other consumer services through the Signature Group. Signature is one of the largest direct marketing companies in the United States. See "BUSINESS--Direct Marketing." The Company's principal executive offices are located at Montgomery Ward Plaza, Chicago, Illinois 60671, and its telephone number at such offices is (312) 467-2000. RISK FACTORS THE PURCHASE OF THE SHARES OFFERED HEREBY INVOLVES A NUMBER OF SIGNIFICANT RISKS. PROSPECTIVE PURCHASERS SHOULD CONSIDER, AMONG OTHER RISKS, THE FOLLOWING: LACK OF PUBLIC MARKET; INABILITY OF THE COMPANY TO PAY CASH FOR SHARES ON EXERCISE OF A PUT OR CALL OPTION; USE OF A NOTE; DELAY IN EXERCISE OF CALL OPTIONS. There is no existing market for the Shares. Additionally, the Stockholders' Agreement contains significant restrictions on transfer, rights of refusal with respect to transfers other than to Permitted Transferees and put and call options. The purchase price for Shares purchased under the Stockholders' Agreement, for reasons other than voluntary termination of Purchaser's employment (other than by reason of normal retirement in accordance with the Ward Group retirement policies) or such Purchaser's termination for Cause, may be paid 25% at the time of the purchase with the balance payable in three equal installments, together with interest, on the first three anniversaries of the purchase. The purchase price paid to purchase Shares as a result of the voluntary termination of Purchaser's employment (other than by reason of normal retirement in accordance with the Ward Group retirement policies) or termination of Purchaser's employment for Cause may be paid 16 2/3% at the time of the purchase with the balance payable in five equal installments, together with interest, on the first five anniversaries of the purchase. In either case, the balance of the purchase price will be 14 evidenced by a note and secured by a pledge of Voting Trust Certificates representing Shares having a Fair Market Value (as defined herein) (determined as of the date of closing of the purchase) equal to the balance of the purchase price. Under the Stockholders' Agreement, the Company's obligations to purchase Shares and to make cash installment payments for Shares purchased will be suspended for up to one year if payments resulting from such purchase or such installment payments, as the case may be, would exceed certain specified amounts for the fiscal year in which the payments are to be made or would violate any applicable provision of the General Corporation Law of the State of Delaware or such payments or dividends from Montgomery Ward to the Company to fund such payments would violate any material agreement to which any member of the Ward Group is a party. To the extent that after the expiration of such one- year period, (i) the Company remains unable to make any portion or all of such repurchase without causing such a violation, the Company will be relieved of such repurchase obligation and the Shares not so repurchased will remain subject to all applicable provisions of the Stockholders' Agreement or (ii) the Company remains unable to make any portion or all of such installment payments without causing such a violation, the Company will not be required to make such payments and the holder of the note with respect thereto shall have the right to foreclose on the collateral securing such note, but any other claims that the holder of such note may have will be subordinated to the most junior indebtedness for money borrowed of the Ward Group and all indebtedness for money borrowed senior thereto. FINANCING RESTRICTIONS AND DIVIDEND PAYMENT RESTRICTIONS. Montgomery Ward's financing agreements impose various restrictions on Montgomery Ward, including the satisfaction of certain financial tests and restrictions on the ability to pay dividends or make any other distributions to the Company or redeem any common stock of Montgomery Ward (including, without limitation, whether or not any of such actions are sought to be taken in connection with the repurchase of Shares pursuant to the terms of the Stockholders Agreement). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-- Discussion of Financial Condition," for a description of such restrictions. In addition, holders of Senior Preferred Stock will have a prior right to dividend payments before any dividends can be declared or paid on Common Stock. See Note 17 to the Consolidated Financial Statements for restrictions on dividends which may be paid by the insurance subsidiaries of Signature. UNCERTAINTIES OF THE ECONOMY. The results of Montgomery Ward's operations are subject to changes in consumer demand associated with general economic conditions, which is especially true with respect to demand for durable goods and other "big ticket" merchandise. Montgomery Ward's businesses could also be affected by future price changes, legislation, taxes, labor conditions, unseasonable or unusual weather conditions and transportation regulations. Additionally, because Montgomery Ward sells merchandise to "middle America", results may be significantly impacted by slowdowns affecting that segment of the general economy. See "BUSINESS--Merchandising." NEW STORE LOCATIONS. Montgomery Ward has a growth strategy for the next several years. As a key part of this strategy, Montgomery Ward anticipates opening a number of new full-line stores which encompass Montgomery Ward's specialty store concept. Montgomery Ward seeks to open several of such new stores in or near existing Montgomery Ward markets to further leverage advertising expenditures, existing distribution facilities and the corporate administrative structure. In addition, Montgomery Ward has announced plans to open six Electric Avenue & More stores in 1994. These specialty stores will be opened in markets with populations of 150,000 to 200,000, where full-line stores have not traditionally operated and in multi-store markets in which Montgomery Ward cannot find suitable locations for additional full-line stores. The ability to open new stores is dependent upon, among other things, sufficient capital to fund the acquisitions and the availability of locations in areas desired by Montgomery Ward, neither of which is entirely within the control of the Company or Montgomery Ward. TRANSFER RESTRICTIONS. The Shares covered hereby are subject to the Stockholders' Agreement. Pursuant to the terms of the Stockholders' Agreement, Purchasers are designated as either Type 1 Management Shareholders or Type 2 Management Shareholders. Although designated "Management Shareholders," the Stockholders Agreement does not require that Type 1 Management Shareholders or Type 2 Management 15 Shareholders be associates of the Ward Group. Purchasers are Type 2 Management Shareholders unless otherwise specifically designated by the Designator with the consent of GE Capital. A Type 2 Management Shareholder generally may not sell, assign, pledge, encumber or otherwise transfer to any person the Shares for a period of three years after the date of his or her first purchase of any shares of the Common Stock, without distinction as to class or series. Certain transfers, such as those made with the approval of the Board of Directors or to certain family members or other Permitted Transferees will be permitted during that three-year period. See "THE STOCKHOLDERS' AGREEMENT--Restrictions on Transfer". Except for certain limited permitted transfers, no transfer may be made of Non-Vested Shares and only specified percentages of Vested Shares may be transferred in the fourth and fifth years after the date of a Management Shareholder's first acquisition of any shares of the Common Stock, without distinction as to class or series. For an indefinite period of time after the Shares become Vested Shares and until the date, if any, when the Public Offering Termination Date occurs, all such transfers by Purchasers will only be permitted subject to rights of first refusal held by the Designated Management Optionees, the Company and GE Capital. If and when the Public Offering Termination Date occurs, the restrictions on transfers of Shares by persons owning less than 1% of the voting power and dividend and liquidation rights of the Common Stock will be eliminated. Purchasers may have only limited opportunities to dispose of their Shares for a substantial period of time, except for mandatory dispositions made as a result of termination of employment. All of the shares of Class B Common Stock and virtually all of the outstanding shares of Class A Common Stock are eligible for transfer, subject to the rights of first refusal described above. The restrictions contained in the Montgomery Ward financing agreements may significantly limit the Company's ability to exercise its right of first refusal with respect to the transfer of any such Shares. CALL OF SHARES UPON TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. If a Type 2 Management Shareholder's employment is terminated for any reason including his or her death or total permanent disability, and upon the death of a Type 2 Management Shareholder following termination of employment, the Designated Management Optionees and the Company will have the right to purchase all or any portion of that Type 2 Management Shareholder's Shares (a "call"). The purchase price of Non-Vested Shares will generally be the lesser of the price paid for them upon their issuance or reissuance by the Company or their "Fair Market Value" determined in accordance with the terms of the Stockholders' Agreement. The purchase price for Shares which are vested for purposes of the Stockholders' Agreement will be their Fair Market Value as so determined. Generally, 20% of the shares (which are not Plan Shares) will become Vested Shares on each of the first five anniversaries of the date of the initial purchase of any shares of Common Stock, without distinction as to class or series, by a Type 2 Management Shareholder, 20% of Plan Shares will become Vested Shares on each of the first five anniversaries of the beginning of the applicable vesting period with respect thereto, provided that, unless otherwise determined in writing by the Designator, Plan Shares subject to purchase upon exercise of an Option become Vested Shares upon such purchase, and 100% of a Management Shareholder's shares will become Vested Shares upon the death or total permanent disability of such Management Shareholder while he or she is an associate of the Ward Group. If a Purchaser's employment with the Ward Group is terminated for Cause, such Purchaser's shares (excluding Shares which were Vested when purchased as a Designated Management Optionee) will be treated as Non-Vested Shares. See "THE STOCKHOLDERS' AGREEMENT". FAIR MARKET VALUE. In the absence of a public market, "Fair Market Value" for purposes of the Stockholders' Agreement is based upon the fair market value of the consolidated common equity of the Company as determined annually by the Board of Directors. The fair market value of the common equity as so determined by the Board of Directors will be adjusted by adding: (i) an amount equal to the Fair Market Value at the date of grant of the shares underlying all outstanding and unexpired Options, Purchase Rights or other options or rights to acquire shares of Common Stock; (ii) the amount of cash and other consideration (including any difference between the Fair Market Value at the date of grant and the exercise price) received or receivable by the Company during the 16 then-current fiscal year on account of the exercise of any Options, Purchase Rights, or other options or rights to acquire shares of Common Stock; and (iii) the aggregate consideration received by the Company for shares of Common Stock issued in the then-current fiscal year not accounted for in either (i) or (ii) above; and by subtracting: (i) the aggregate amount of dividends paid or payable on Common Stock in the then-current fiscal year; and (ii) the aggregate amount paid by the Company to redeem, repurchase or otherwise acquire for consideration shares of Common Stock during the then-current fiscal year. Based upon the calculation of the fair market value of the common equity as set forth above, the Fair Market Value per share of Class A Common Stock (taking into account all outstanding Options and allocating dilution therefrom between the holders of the Class A Common Stock and the Class B Common Stock as set forth in the Stockholders Agreement) will be calculated on the date as specified in the Stockholders' Agreement; provided, however, that no adjustment to such Fair Market Value per share as calculated as of the first day of the then-current fiscal year will be required unless such adjustment would result in an increase or a decrease of at least 1% from the amount as so determined as of the beginning of the then-current fiscal year. The fair market value of the consolidated common equity of the Company as determined by the Board of Directors was $1,260 million as of January 2, 1994, and the amount as so adjusted was $1,336 million at that date. Therefore, for purposes of the Stockholders' Agreement, the Fair Market Value per share of Class A Common Stock outstanding at that date was $26.50. Absent a trading market, there is no assurance that the determination by the Board of Directors as so adjusted will reflect the actual fair market value of Shares at the time Purchaser sells such Shares pursuant to a put or call right. See "THE STOCKHOLDERS' AGREEMENT--Ownership of Shares." CONTROL OF THE COMPANY. Pursuant to the Voting Trust Agreement, until June 21, 1998 the Voting Trustee will have the power to exercise voting control over all of the outstanding shares of Class A Common Stock, other than such shares owned by Brennan and certain trusts established for the benefit of members of his family. Consequently, the owners of such shares will have no voting power with respect to the election of the Board of Directors or other matters during such period. In the event that the Voting Trust is not in effect or, in the event shares are not subject to the Voting Trust, all shares held by shareholders, except those shares held by Brennan and certain trusts for the benefit of members of his family, are subject to an agreement (contained in the Stockholders' Agreement) pursuant to which shareholders agree to vote their shares in the same manner Brennan votes his shares. Pursuant to the Stockholders' Agreement and the By-Laws of the Company, the Board of Directors will consist of five persons designated by the Designator and four persons designated by GE Capital. See "MANAGEMENT". See "THE STOCKHOLDERS' AGREEMENT," and "THE VOTING TRUST AGREEMENT." The holders of Senior Preferred Stock have the right to elect an additional director to the Board of Directors (a) during the period following a default in the payment of accrued dividends on the Senior Preferred Stock for four consecutive quarters until such accrued dividends shall have been paid in full and (b) during the period following any failure to make a mandatory redemption of Senior Preferred Stock until such failure shall have been cured. See "DESCRIPTION OF EQUITY SECURITIES--Senior Preferred Stock--Voting Rights." If GE Capital and its affiliates cease to own more than 50% of the number of shares of Common Stock initially purchased by them, the number of directors which the Designator is permitted to designate will be increased by one and the number of directors which GE Capital may designate will be reduced by one. If GE Capital and its affiliates cease to own 20% or more of such shares of Common Stock, except as described below, GE Capital will have no right to designate any directors. In that event, the number of directors will 17 be reduced to seven, five of whom will be elected by the holders of Class A Common Stock, voting as a class, and two of whom will be elected by the holders of Class B Common Stock, voting as a class; provided that, so long as the Account Purchase Agreement remains in effect and GE Capital or any of its affiliates owns any shares of Class B Common Stock, GE Capital will be entitled to elect one of the directors to be elected by holders of Class B Common Stock. INTEREST RATE SENSITIVITY. Under the Restated Credit Agreement, the Short Term Agreement and the Term Loan Agreement (each as herein defined), Montgomery Ward may select among several interest rate options, including a rate negotiated with one or more of the various lenders. The interest rates for the aforementioned bank borrowings are based on market rates and significant increases in market interest rates will increase interest payments required. In addition, Montgomery Ward's obligations under the Account Purchase Agreement are also interest rate sensitive. Under the Account Purchase Agreement, Montgomery Ward is required to pay to Montgomery Ward Credit the excess interest costs on a monthly basis if a blended interest rate applicable to Montgomery Ward Credit's finance costs with respect to the receivables exceeds 10%. To date, such blended interest rate has not exceeded 10%. See "BUSINESS-- Account Purchase Agreement." THE STOCKHOLDERS' AGREEMENT GENERAL All of the current holders of Class A Common Stock, Series 1 and Class B Common Stock are parties to (and all Purchasers hereunder will be required to become subject to) the Stockholders' Agreement. The summary which follows is qualified in its entirety by reference to the Stockholders' Agreement which, as in effect on the date hereof and as contemplated to be amended as of the date hereof, is attached hereto as Annex 1. In this section of this Prospectus (under the caption "THE STOCKHOLDERS' AGREEMENT") the word "Shares" is used to refer to shares of Class A Common Stock, Series 1, Series 2 and Series 3 and Class B Common Stock and includes Voting Trust Certificates. "Shareholders" refers to holders of Shares as so defined. Plan Shares which are not subject to the Stockholders' Agreement are subject to the Terms and Conditions. Although the descriptions set forth herein of the treatment of Shares pursuant to the Stockholders' Agreement is not applicable to such Plan Shares, the Terms and Conditions and the Stockholders' Agreement contain terms substantially similar to each other with respect to the subject of this discussion. The descriptions of the treatment of Plan Shares herein refer to Plan Shares subject to the Stockholders' Agreement, unless otherwise indicated. OWNERSHIP OF SHARES CLASSIFICATION OF MANAGEMENT SHAREHOLDERS. The Stockholders' Agreement classifies the Management Shareholders as Type 1 Management Shareholders and Type 2 Management Shareholders. There is no requirement in the Stockholders' Agreement that Type 1 Management Shareholders or Type 2 Management Shareholders be associates of the Ward Group. All Shares purchased by a Type 1 Management Shareholder are Vested Shares at the time of purchase of his or her Shares. A Type 2 Management Shareholder's Shares (other than Plan Shares) will generally become Vested Shares (unless they are Vested Shares when acquired) over a five- year period beginning on the date of the earliest acquisition of any Shares, without distinction as to class or series, by the applicable Management Shareholder. Prior to an Event, Brennan as Designator, and from and after the occurrence of an Event, the Committee as Designator, determines whether a Management Shareholder is a Type 1 Management Shareholder or a Type 2 Management Shareholder, subject to the consent of GE Capital as long as GE Capital owns at least 20% of the Shares initially purchased by GE Capital. All of the members of Montgomery Ward's management who are currently Shareholders (other than Brennan) are Type 2 Management Shareholders. Brennan, Silas S. Cathcart and Myron Lieberman are currently the only Type 1 Management Shareholders. Purchasers of Shares will be classified as Type 1 Management Shareholders or Type 2 Management Shareholders upon entering into the Stockholders' Agreement. However, it is currently anticipated that all Management Shareholders, other than current Type 1 Management Shareholders and certain individuals and entities who may receive Shares in connection with the purchase by Montgomery Ward of Lechmere, will be classified as Type 2 Management Shareholders. 18 THE DESIGNATOR AND THE COMMITTEE. Prior to the occurrence of an Event, for all purposes other than designating (and in connection with the designation of) Designated Management Optionees, the Designator is Brennan. At all times for purposes of (and in connection with) the designation of Designated Management Optionees, and from and after the occurrence of an Event for all purposes (including, without limitation the designation (and in connection with the designation) of Designated Management Optionees), the Designator is the Committee (which is made up of three Management Shareholders). The Committee, except as provided below, will be comprised of Brennan, Pohlmann and Lieberman. Brennan is currently Chairman and Chief Executive Officer and a director of the Company, Pohlmann is currently Executive Vice President of the Company and Lieberman is currently a director of the Company. Prior to the occurrence of an Event, if any member of the Committee resigns from the Committee or ceases to be a Qualified Management Shareholder, then such person will cease to be a member of the Committee and the remaining members of the Committee will, as soon as practicable, appoint a Qualified Management Shareholder as a member of the Committee and thereby fill the vacancy on the Committee so created. From and after the occurrence of an Event, the Committee will be comprised of Heine (currently Executive Vice President, Secretary and General Counsel and a director of the Company), Pohlmann and Lieberman (each of Heine, Pohlmann and Lieberman being a Continuing Member and collectively being the Continuing Members) so long as each is a Qualified Management Shareholder; provided, however, that at any time from and after the occurrence of an Event (i) if one, but only one, Continuing Member has resigned from the Committee or has ceased to be a Qualified Management Shareholder, then the Committee will be comprised of the two remaining Continuing Members who have not resigned and are Qualified Management Shareholders and the Largest Management Shareholder (as defined below) (but the Second Largest Management Shareholder (as defined below) shall be such replacement member of the Committee if the Largest Management Shareholder is one of such remaining Continuing Members, and the Third Largest Management Shareholder (as defined below) shall be such replacement member of the Committee if both the Largest Management Shareholder and the Second Largest Management Shareholder are such remaining Continuing Members), (ii) if each of two, but only two, of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee will be comprised of the remaining Continuing Member who has not resigned and is a Qualified Management Shareholder, the Largest Management Shareholder and the Second Largest Management Shareholder (but the Second Largest Management Shareholder and the Third Largest Management Shareholder shall be such replacement members of the Committee if the Largest Management Shareholder is such Continuing Member, and the Largest Management Shareholder and the Third Largest Management Shareholder shall be such replacement members of the Committee if the Second Largest Management Shareholder is such Continuing Member), and (iii) if each of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee will be comprised of the Largest Management Shareholder, the Second Largest Management Shareholder and the Third Largest Management Shareholder. In all cases, the Committee will act by the vote of a majority of its members; provided, however, that neither a member of the Committee nor a member of his Family (as defined in the Stockholders' Agreement) may be designated as a Designated Management Optionee except upon the affirmative vote of all other members of the Committee. A "Qualified Management Shareholder" is each of Lieberman and any other person who is a Management Shareholder and employed by a member of the Ward Group. A person will cease to be a Qualified Management Shareholder if he (i) ceases to be a Management Shareholder, (ii) dies, (iii) is adjudicated incompetent, (iv) in the case of Lieberman, ceases to be a director of the Company or (v) in the case of any Management Shareholder other than Lieberman, ceases to be employed by one or more members of the Ward Group so that thereafter no member of the Ward Group employs such Management Shareholder. An "Event" means that Brennan has either resigned from the Committee or ceased to be a Qualified Management Shareholder. 19 The "Largest Management Shareholder" is the Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve as a member of the Committee. The "Second Largest Management Shareholder" is the Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. The "Third Largest Management Shareholder" is the Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. For the purposes of determining the Largest Management Shareholder, the Second Largest Management Shareholder and the Third Largest Management Shareholder, a Management Shareholder is deemed to own all Shares owned by his or her Permitted Transferees. In the event that two or more persons own the same number of Shares so that each, in the absence of the other (or others, as the case may be) would be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder (as the case may be), then the remaining member (or members, as the case may be) of the Committee from time to time shall determine which of such person or persons shall be deemed to be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder, as the case may be. RESTRICTIONS ON TRANSFER BY MANAGEMENT SHAREHOLDERS. The Stockholders' Agreement contains important restrictions on transfers of Shares. Certain transfers, such as those made with the approval of the Board of Directors, by Brennan to other Management Shareholders, by other Management Shareholders to Brennan, by a Management Shareholder to a bank to secure a loan to purchase such Shares and to family members and other Permitted Transferees are permitted. No other transfers by a Management Shareholder of Shares will be permitted for a period of three years from the date such Management Shareholder first acquired any Shares, without distinction as to class or series, except after the earlier occurrence of the Public Offering Termination Date. After such three-year period (or earlier occurrence of the Public Offering Termination Date) other transfers may be made, but only of Vested Shares and subject to rights of first refusal and to limits on the amount of Vested Shares that may be transferred by a Management Shareholder and his or her Permitted Transferees of 1/3 and 1/2, respectively, of the Vested Shares held at the beginning of each year during the first and second years after the expiration of such three-year period. Generally, no Management Shareholder is permitted to make such transfers unless he, she or it has received a written offer to purchase from a third party. In any event, transferees will be subject to the reasonable approval of the Board of Directors of the Company. If the transferor is a Management Shareholder, any Designated Management Optionees will have the first right of refusal, the Company will have a second right of refusal, and GE Capital will have the third right of refusal to purchase the Shares on the terms of the proposed transfer. RESTRICTIONS ON TRANSFERS BY GE CAPITAL AND ITS AFFILIATES. The Stockholders' Agreement grants a first right of offer in favor of the Designated Management Optionees and a second right of offer in favor of the Company in connection with transfers by GE Capital and its affiliates. 20 PURCHASE OF SHARES UPON TERMINATION OF EMPLOYMENT OF A TYPE 2 MANAGEMENT SHAREHOLDER. Upon (or in certain cases following) the termination of a Type 2 Management Shareholder's employment with all members of the Ward Group for any reason other than death or total permanent disability, any Designated Management Optionees will have an option to purchase all or any portion of the Shares owned by such Type 2 Management Shareholder and each of his or her Permitted Transferees and, to the extent that those options are not exercised, the Company will have an option to purchase all or any portion of such Shares. PURCHASE OF SHARES UPON THE DEATH OR TOTAL PERMANENT DISABILITY OF A TYPE 2 MANAGEMENT SHAREHOLDER DURING EMPLOYMENT. Upon the death of a Type 2 Management Shareholder while such Type 2 Management Shareholder is an associate of any member of the Ward Group, or upon (or in certain cases following) the termination of employment of a Type 2 Management Shareholder with any member of the Ward Group by reason of total permanent disability, the personal representative of the deceased or totally disabled Type 2 Management Shareholder or the totally disabled Type 2 Management Shareholder and each Permitted Transferee of the deceased or totally disabled Type 2 Management Shareholder, will each have a 90-day option to sell all or any portion of the Shares then owned by such respective Shareholders. Any Designated Management Optionees will have the option to purchase all or any portion of the Shares as to which the options to sell were exercised, and the Company will be required to purchase the Shares as to which the options to sell were exercised and which were not purchased by any Designated Management Optionee. Any Designated Management Optionees will also have the option to purchase all or any portion of the Shares as to which the options to sell were not exercised, and the Company will have the option to purchase the Shares as to which the options to sell were not exercised and which were not purchased by any Designated Management Optionee. Such 90-day options to sell will terminate upon the Public Offering Termination Date. PURCHASE OF SHARES UPON THE DEATH OF A TYPE 2 MANAGEMENT SHAREHOLDER FOLLOWING TERMINATION OF EMPLOYMENT. Upon the death of a Type 2 Management Shareholder following termination of the Type 2 Management Shareholder's employment with all members of the Ward Group, if that Type 2 Management Shareholder and his or her Permitted Transferees did not previously sell all Shares owned by them pursuant to the Stockholders Agreement, any Designated Management Optionees will have an option to purchase all or any portion of the Shares owned by such Type 2 Management Shareholder at the time of death and each of his or her Permitted Transferees, and the Company will have an option to purchase all or any portion of the Shares which are not purchased by any such Designated Management Optionees. PURCHASE OF SHARES UPON THE TERMINATION OF BRENNAN'S EMPLOYMENT WITHOUT CAUSE. Upon (or in certain cases following) the termination of Brennan's employment with all members of the Ward Group which occurs by reason of the Ward Group's termination of Brennan's employment without Cause, Brennan and each of his Permitted Transferees will have the option from time to time, to sell to the Company at Fair Market Value all or any portion of the Shares then owned by such respective Shareholders. PURCHASE OF SHARES UPON THE TERMINATION OF BRENNAN'S EMPLOYMENT BY REASON OF HIS DEATH OR TOTAL PERMANENT DISABILITY. Upon (or in certain cases following) the termination of Brennan's employment with the Ward Group by reason of his death or total permanent disability, in each case before the Public Offering Termination Date, Brennan or his personal representative (as the case may be) and each of his Permitted Transferees will have the option from time to time for up to five years to sell to the Company all or any portion of the Shares then owned by such respective Shareholders and the Company will have the option to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not theretofore exercise their respective options to sell, provided that the number of Shares as to which the Company may exercise such options, when added to the number of Shares as to which Brennan or his personal representative and his Permitted Transferees have theretofore exercised their options, may not exceed 35% of the Shares (as adjusted for stock dividends and split-ups) which Brennan and his Permitted Transferees purchased in connection with the acquisition of Montgomery Ward. For all such purchases, the purchase price will be the Fair Market Value of the Shares purchased. 21 PURCHASE OF SHARES UPON THE DEATH OF BRENNAN FOLLOWING THE TERMINATION OF HIS EMPLOYMENT WITH THE WARD GROUP. Upon the death of Brennan following the termination of his employment with the Ward Group and prior to the Public Offering Termination Date, Brennan's personal representative, and each of his Permitted Transferees, shall have the option from time to time for up to five years after Brennan's death to sell to the Company at Fair Market Value all or any portion of the Shares then owned by such respective Shareholders. PURCHASE OF SHARES UPON THE DEATH OF A TYPE 1 MANAGEMENT SHAREHOLDER OTHER THAN BRENNAN. In the event of the death of any Type 1 Management Shareholder other than Brennan before the Public Offering Termination Date, the personal representative of the deceased Type 1 Management Shareholder, and each Permitted Transferee of the deceased Type 1 Management Shareholder will each have a 90-day option to sell at Fair Market Value all or any portion of the Shares then owned by such respective Shareholders. Any Designated Management Optionees will have the option to purchase all or any portion of the Shares as to which the options to sell were exercised, and the Company will be required to purchase the Shares as to which the options to sell were exercised and which were not purchased by any Designated Management Optionees. PURCHASE PRICE OF SHARES. Generally the purchase price ("Purchase Price") of Shares to be purchased from Type 2 Management Shareholders and their Permitted Transferees under the provisions described above will be the Fair Market Value for Vested Shares and the lesser of the Fair Market Value and the acquisition price upon issuance or resale by the Company (or $.01 per share in the case of an Award) for Non-Vested Shares. If options are exercised for less than all of the Shares owned by a Type 2 Management Shareholder and his Permitted Transferees, in determining the Purchase Price, the Non-Vested Shares will be deemed to have been purchased or sold first. The Purchase Price of Non-Vested Shares that are purchased as a result of the death of a Type 2 Management Shareholder following termination of employment will be increased by a simple interest factor of 8% per annum calculated from the date of termination of employment until the purchase is consummated, provided that the Purchase Price, as so increased, will not exceed the Fair Market Value. VESTING OF SHARES. All Shares are classified as either Vested Shares or Non- Vested Shares under the Stockholders' Agreement. All Shares held by any Type 1 Management Shareholder are Vested Shares. Shares held by a Type 2 Management Shareholder (other than Plan Shares) are Vested Shares and Non-Vested Shares as follows. All Vested Shares purchased by a Type 2 Management Shareholder shall continue to be Vested Shares in the hands of such Purchaser. All Non-Vested Shares purchased by a Type 2 Management Shareholder, who was not a holder of Shares prior to such purchase, will be Non-Vested Shares as of the date of such purchase and will become Vested Shares as described below. Non-Vested Shares purchased by a Type 2 Management Shareholder, who was a holder of Shares prior to such purchase, will be Vested Shares to the extent of such Type 2 Management Shareholder's Vested Percentage, such Vested Percentage being equal to the percentage of Shares which would have been Vested Shares as of the date of such purchase if such Type 2 Management Shareholder had owned such Shares since the date such Type 2 Management Shareholder first acquired any Shares, without distinction as to class or series. Except to the extent a vesting schedule is accelerated by the Designator at its discretion, generally, 20% of all Non- Vested non-Plan Shares held by a Type 2 Management Shareholder will become Vested Shares on each of the first five anniversaries of the date of the earliest acquisition of any non-Plan Shares, without distinction as to class or series, by such Type 2 Management Shareholder. Plan Shares acquired by a Type 2 Management Shareholder pursuant to Awards, or upon exercise of Purchase Rights or Options shall be Vested Shares and Non-Vested Shares as follows. The vesting period for Plan Shares received pursuant to an Award or purchased upon the exercise of a Purchase Right begins with the date of the grant of the Award or the exercise of the Purchase Right, respectively. The vesting period for Plan Shares purchased upon the exercise of an Option begins with the date of the grant, but no such Plan Shares shall be vested prior to purchase. Subject to the limitations stated with respect to Plan Shares subject to an Option, 20% of the Plan Shares granted pursuant to an Award, Purchase Right or Option will vest on each of the first five anniversaries of the beginning of the applicable 22 vesting period with respect thereto, provided that, unless otherwise determined in writing by the Designator, Plan Shares subject to purchase upon exercise of an Option become Vested Shares upon such purchase. As is the case with Non- Vested Shares which are not Plan Shares, the Designator may accelerate the vesting of Non-Vested Plan Shares. All Non-Vested Shares will become Vested Shares on the Public Offering Termination Date, other than for purposes of the call options which arise upon death following termination of employment. All Non-Vested Shares of a Type 2 Management Shareholder who shall have died or become totally permanently disabled while an associate of the Ward Group shall become Vested Shares as of the date of such death or disability. All Shares, whether Vested Shares or Non-Vested Shares, held by an associate of the Ward Group shall become Non-Vested Shares upon the termination of such associate's employment with the Ward Group for Cause, other than Shares that were Vested Shares when acquired by such associate other than through application of such associate's Vested Percentage. MANNER OF PAYMENT. Except as described below, the Purchase Price will generally be paid 25% in cash at the closing of the purchase with the balance payable in three equal annual installments on the first, second and third anniversaries of such closing. The Company will be permitted to offset such cash payment and any principal and interest payments due thereunder against any amount due under the Line of Credit Program (as hereinafter defined) and to make payments to a Bank (as hereinafter defined) on behalf of such selling shareholder in lieu of paying a like amount to said shareholder. If certain life insurance proceeds are obtained by any member of the Ward Group and the Company is purchasing Shares of a deceased Management Shareholder or his or her Permitted Transferees, the portion of the purchase price to be paid in cash shall be increased by the amount of available proceeds. However, in the event of a purchase of Shares following the voluntary termination of employment of a Type 2 Management Shareholder with all members of the Ward Group (other than by reason of normal retirement in accordance with the Ward Group's applicable retirement policies), or the termination of employment of such Management Shareholder with a member of the Ward Group for Cause, the amount which shall be paid at closing will generally be 16 2/3% of the Purchase Price, and the balance of the Purchase Price will be paid in five equal annual installments on the first through fifth anniversaries of such closing. In such cases, the Company may offset payments to, or make payments on behalf of, such selling shareholder in the manner described above for the three-year installments. In all cases the balance of the Purchase Price will be evidenced by a note of the type described in the Stockholders Agreement and secured in the manner described therein. POSSIBLE DELAY IN PURCHASE OF SHARES OR PAYMENT FOR SHARES PURCHASED BY THE COMPANY. Under certain circumstances, the Company is given up to one year to complete a purchase of Shares (or make an installment payment for Shares previously purchased) it could not otherwise make because of applicable corporate law, cash payment limitations set forth in the Stockholders' Agreement or because the payment by the Company with respect to such purchase or such installment payment, as the case may be, or a payment or dividend from Montgomery Ward to the Company to fund such payment would constitute a breach of a material contract to which any member of the Ward Group is a party. To the extent that after the expiration of such one-year period, (i) the Company remains unable to make any portion or all of such repurchase without causing such a violation, the Company will be relieved of such repurchase obligation and the Shares not so repurchased will remain subject to all applicable provisions of the Stockholders' Agreement or (ii) the Company remains unable to make any portion or all of such installment payments without causing such a violation, the Company will not be required to make such payments and the holder of the note with respect thereto shall have the right to foreclose on the collateral securing such note, but any other claims that the holder of such note may have will be subordinated to the most junior indebtedness for money borrowed of the Ward Group and all indebtedness for money borrowed senior thereto. In connection with the foregoing, the Company is conditionally permitted to exercise options to purchase Shares from Type 2 Management Shareholders in which case the purchase of such Shares may be delayed for up to one year. CONTROL MATTERS VOTING OF SHARES. So long as the Voting Trust is in effect, all Shares deposited therein will be voted by the Voting Trustee (currently Brennan). All Class A Shares, other than those held by Brennan and certain 23 trusts for the benefit of members of his family, are currently deposited in the Voting Trust. In the event that the Voting Trust is not in effect or in the event Shares deposited therein are not subject to the Voting Trust, all Class A Shares held by the Shareholders, except those Shares held by Brennan and certain trusts for the benefit of members of his family, are subject to a voting agreement under which the holders agree to vote their Shares in the same way Brennan votes his Shares until June 17, 1998. DIRECTORS. The Board of Directors consists of nine members. The Stockholders' Agreement requires the parties thereto to elect all such directors, five to be designated, prior to the occurrence of an Event, by Brennan as Designator, and from and after the occurrence of an Event, by the Committee as Designator, and four to be designated by GE Capital. See "MANAGEMENT--Directors and Executive Officers." If GE Capital and its affiliates cease to own more than 50% of the number of shares of Common Stock initially purchased by them, the number of directors which, prior to the occurrence of an Event, Brennan as Designator, and from and after the occurrence of an Event, the Committee as Designator, is permitted to designate will be increased by one, and the number of directors which GE Capital may designate shall be reduced by one. If GE Capital and its affiliates cease to own 20% or more of such shares of Common Stock, except as described below, GE Capital shall have no right to designate any directors, and the number of directors shall be reduced to seven, five of whom will be elected by the holders of Class A Common Stock, voting as a class, and two of whom will be elected by the holders of Class B Common Stock, voting as a class; provided that, so long as the Account Purchase Agreement (as herein defined) remains in effect, and GE Capital or any of its affiliates owns any Shares, without distinction as to class or series, GE Capital will be entitled to elect one of the two directors to be elected by the holders of Class B Common Stock. The holders of the Senior Preferred Stock have the right to elect one director to be an additional member of the Board of Directors (a) during the period following a default in the payment of accrued dividends on the Senior Preferred Stock for four consecutive quarters until such accrued dividends shall have been paid in full and (b) during the period following any failure to make a mandatory redemption of Senior Preferred Stock until such failure shall have been cured. The Stockholders' Agreement requires that the Company's by-laws contain supermajority provisions which require that certain actions, such as mergers, substantial asset sales, certain amendments to the Company's Certificate of Incorporation or By-laws, payment of dividends and redemption of Shares other than in accordance with the terms of the Stockholders Agreement, public offerings and certain other major corporate transactions be undertaken only upon the approval of two-thirds of the directors of the Company. See "DESCRIPTION OF EQUITY SECURITIES--By-Laws; Certain Matters Requiring the Vote of Two- Thirds of the Directors." REGISTRATION RIGHTS The Stockholders' Agreement grants to certain Shareholders who are parties thereto certain registration rights. Such registration rights do not inure to the benefit of and are not applicable to any Management Shareholder who (a) first became a party to the Stockholders Agreement after June 15, 1991 and (b) at the time he seeks to assert any rights thereunder owns less than 10,000 Shares (including, for this purpose, Plan Shares). When available, such registration rights provide in substance that the Management Shareholders (as one "Group" directed exclusively, prior to the occurrence of an Event, by Brennan as Designator, and from and after the occurrence of an Event, by the Committee as Designator, in its sole discretion) and GE Capital and its present and former affiliates (as the other "Group") may demand, on two separate occasions for each Group, that the Company register with federal and state authorities such Group's Shares (including, for this purpose, Plan Shares) for sale to the public, all at the Company's expense. Additional registrations can be demanded if the registration statement is not maintained continuously effective for 120 days and an unlimited number of demands for registration on Form S-3 under the Act are permitted at any time when the Company is eligible to register shares on Form S-3. In each such case all Shareholders may participate pro rata in the public offerings, subject to "cutback" if deemed necessary by the managing underwriter(s), provided that they elect to participate within certain time limits. In addition to such demand registration rights each Group will be entitled to "piggyback" for an unlimited number of occasions as selling shareholders in any public offerings 24 of stock initiated by the Company, other than registrations on Form S-4 or S-8 under the Act or any form substituting therefor or any registration statement filed in connection with an offering of securities or granting of options primarily to associates of any member of the Ward Group or the registration statement of which this prospectus is a part (or any similar registration statement in connection with the Stockholders' Agreement). Such "piggyback" rights are subject to "cutback" if deemed necessary by the managing underwriters, and eligible Shareholders must elect whether to participate within certain time limits. The Company will not be required to include any Shares as a result of the "piggyback" rights if it obtains the opinion of counsel reasonably satisfactory to the Shareholders seeking to exercise such rights that such registration is not required for the proposed sale or that a post-effective amendment to an existing registration statement filed simultaneously with the proposed sale would be sufficient to permit the sale, and the Company files the post-effective amendment. In no event can any Management Shareholder's Shares be sold in any demand or "piggyback" registrations unless the Voting Trustee shall, in his sole discretion, have released such Shares to be registered from the Voting Trust and all such Shares must be Vested Shares. Purchasers should be aware that the exercise of such registration rights can subject the Company to substantial expense. As a condition to their exercise of the registration rights, selling Shareholders are required to provide certain information and to indemnify the Company and the underwriter(s) against certain liabilities, including liabilities for violation of securities laws. The Stockholders Agreement prohibits the Company from granting any registration rights to others on a parity with, or senior to, the registration rights provided in the Stockholders' Agreement. The "piggyback" rights will expire on June 17, 1998. NONCOMPETITION; DEFINITION OF CAUSE Except as provided below, each Management Shareholder (other than Brennan) who was an associate of the Ward Group, during the time he or she is employed by a member of the Ward Group and for a period of three years following the termination of such employment for any reason, other than discharge without Cause, may not directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of, any Competing Business (as hereinafter defined) in any of the states of the United States or any foreign countries in which any member of the Ward Group was so engaged during the period of his or her employment and continues to be so engaged at the time of the complained of act (subject only to certain exceptions such as passive ownership of less than 2% of a public company). These limitations may be waived by a vote of not less than two-thirds of the directors of the Company. In addition, the Stockholders' Agreement provides that the noncompetition provision shall not apply to any person who, (i) if his or her initial purchase of Shares occurred on or prior to June 15, 1991, at no time owned 5,000 or more Shares, or (ii) if his or her initial purchase of Shares occurred after June 15, 1991, at no time owned 25,000 or more Shares. For purposes of the foregoing calculations, Plan Shares, whether or not subject to the Stockholders' Agreement, are included. A Competing Business is defined as any person or entity engaged, in any area of the world, directly or indirectly, in any retail merchandising business conducted from multiple retail locations, of a type engaged in by any member of the Ward Group, or any business of the type engaged in by Signature or any of its subsidiaries (as long as Signature or such subsidiary is a member of the Ward Group), other than the insurance business, as of the time of the complained of act. Cause is defined as (i) the commission of any crime, whether or not involving any member of the Ward Group, which constitutes a felony in the jurisdiction involved; (ii) the sale, use or possession on the premises of any member of the Ward Group of a controlled substance whose sale, use or possession is illegal in the manner used or possessed and in the jurisdiction involved; (iii) the repeated consumption of drugs or alcohol that interferes with the associate's ability to discharge his assigned responsibilities; (iv) an intentional violation of the section of the Stockholders' Agreement containing the noncompetition agreement and the agreement not to divulge confidential information; (v) in the case of a Type 2 Management Shareholder who is employed by the Ward Group, the intentional and repeated failure on the part of such associate to perform such duties as may be delegated to him or her which are commensurate with his or her employment position and in the case of Brennan, the intentional repeated refusal, after repeated written notices thereof from the Board of Directors, to perform such duties at the Company's executive offices in Chicago, Illinois as may be delegated 25 to him which are commensurate with his position as chief executive officer of the Company; or (vi) the unlawful taking or misappropriation of any property belonging to any member of the Ward Group or in which any member of the Ward Group has an interest. The vote of two-thirds of the Board of Directors is required for the termination of Brennan's employment for Cause. In addition to other remedies available to the Company upon violation of the noncompetition agreement by a Type 2 Management Shareholder, the Purchase Price for all Shares previously sold by the Type 2 Management Shareholder and his or her Permitted Transferees upon the exercise of options under the Management Stockholders Agreement will be reduced to the amount which would have been paid to such parties if the Type 2 Management Shareholder had been terminated for Cause, and, if payments in excess of the reduced Purchase Price were previously made, the sellers will be required to refund the excess payments. TERMINATION AND AMENDMENT The Stockholders' Agreement may be terminated only by the Company with the approval of the Board of Directors and the written consent of the beneficial owners of 66 2/3% of the outstanding Shares of each class or upon the sale by the Ward Group of all or substantially all of its aggregate assets (other than an intercompany sale within the Ward Group) to a single purchaser or a related group of purchasers as a single transaction or a related group of transactions, or upon a merger or consolidation of the Company as a result of which the percentage of ownership of the surviving or resulting entity held in the aggregate by the Management Shareholders, Permitted Transferees, GE Capital, GE Capital affiliates and any person owning Shares who is no longer a GE Capital affiliate but who was a GE Capital affiliate at the time such person first acquired Shares, is less than 50% of their percentage of ownership of the Company immediately prior to such merger or consolidation, or upon the sale, to a single purchaser or a related group of purchasers, in a single transaction or a related series of transactions, of not less than 66 2/3% of the outstanding shares of Common Stock of the Company of each class. Termination of the Stockholders' Agreement will not affect any rights which arose prior to termination or the registration rights provisions or the noncompetition and confidentiality agreements contained therein. The Stockholders' Agreement may be amended with the consent of holders of not less than 66 2/3% of the outstanding shares of each class of Common Stock. As long as the Voting Trust is in effect, the Voting Trustee, and once the Voting Trust is no longer in effect, the Designator, will have the power, as attorney in fact, to act for each of the Management Shareholders and each Permitted Transferee in amending the Stockholders' Agreement; provided, however, that any amendment with respect to a matter that relates exclusively to the rights of holders of Shares whose Shares are being sold pursuant to a registration statement, that relates to the Shares being so sold and that does not directly or indirectly affect the rights of the other holders of Shares or Shares not being sold thereunder, must be approved by holders of a majority of the Shares being sold by such shareholders; further provided that no amendment regarding indemnity and contribution in connection with the registration of any Shares under the Act (other than any registrations on Form S-4 or S-8 or any form substituting therefor or any registration statement filed in connection with an offering of securities or granting of options primarily to associates of any member of the Ward Group or any registration statement filed to register Shares primarily or exclusively for transfer upon exercise of options pursuant to the Stockholders Agreement or in connection therewith), is effective with respect to any such registration against any holder of Shares who participated in such registration and is entitled to its protection unless such shareholder consented thereto in writing. CERTAIN FEDERAL INCOME TAX ASPECTS The following summary describes the material federal income tax aspects of the purchase of Shares hereunder. The federal income tax laws are technical and complex whereas the discussion herein is in general terms. The following discussion is not tax advice but is instead a guide to assist parties to the Stockholders' Agreement and their advisors. Furthermore, the tax laws are subject to change (even retroactively) by legislation, administrative rulings and regulations and judicial decisions. This discussion has been prepared by and constitutes the opinion of the law firm of Altheimer & Gray, Chicago, Illinois. 26 Shares purchased hereunder by associates or prospective associates of the Company will be considered transferred in connection with the performance of services. Special rules apply to stock which is transferred to any person in connection with the performance of services by such person. These special rules make a distinction in the tax consequences depending on whether or not the stock so transferred is "transferable" or "not subject to a substantial risk of forfeiture" for purposes of the federal income tax laws. Stock is generally considered subject to a substantial risk of forfeiture if rights with respect to the stock are conditioned upon the future performance of substantial services. Stock is treated as nontransferable unless the rights in such stock of any transferee will not be subject to a substantial risk of forfeiture. Because of the restrictions applicable to the Shares (described under "THE STOCKHOLDERS' AGREEMENT"), it is anticipated that Non-Vested Shares purchased pursuant to the offering made hereunder will be considered nontransferable and subject to a substantial risk of forfeiture upon purchase for purposes of the federal income tax laws. Subject to the effect of an election under section 83(b) of the Code, discussed below, as long as the Shares purchased are nontransferable and subject to substantial risk of forfeiture, they will, in effect, be treated as not having been transferred to the Purchaser. Thus, for example, dividends on such Shares will be treated as compensation and the sale of such Shares will give rise to ordinary income. When such Shares become transferable or not subject to a substantial risk of forfeiture they will, in effect, be treated as having been transferred at such time, and the amount of taxable compensation, if any, deemed to be paid by a member of the Ward Group to the Purchaser will be equal to the excess, if any, of the fair market value (determined without regard to any lapse restriction) of such Shares at such time over the amount paid for the Shares. (A "lapse restriction" is any restriction, such as a vesting requirement, whether imposed by agreement or by law, other than a restriction which by its terms will never lapse.) The Purchaser will include such compensation as ordinary income and the appropriate member of the Ward Group will be entitled to a deduction for compensation paid. The tax basis for such Shares will be the amount paid for such Shares plus the amount of such compensation, if any, included as income. The holding period for long-term capital gain purposes will commence on the next day after the date the Shares become transferable or are not subject to a substantial risk of forfeiture. Any appreciation or decline in value of Shares after they become transferable or not subject to a substantial risk of forfeiture generally will be taxed as a capital gain or loss (either short-term or long-term, as applicable) upon a sale, exchange or other taxable disposition of such Shares. As an alternative to the foregoing tax consequences, a Purchaser within 30 days after the purchase of Shares which are nontransferable and subject to substantial risk of forfeiture may file an election under section 83(b) of the Code, to treat the acquisition of such Shares as a taxable compensation event. If the Purchaser files such election he or she will include in his or her gross income as compensation for the year of the purchase of Shares the excess, if any, of the fair market value of such Shares (determined without regard to any lapse restriction) over the amount he or she paid therefor, and the appropriate member of the Ward Group will be entitled to a compensation deduction in the amount of such excess. In determining the fair market value of Shares (determined without regard to any lapse restriction) for the purpose of computing the amount of compensation includable in a Purchaser's gross income, the IRS will not be bound by the fair market value as determined by any other party and may consider all the facts and circumstances. See "RISK FACTORS--Fair Market Value." A disadvantage of a section 83(b) election is that if such Shares are subsequently forfeited or disposed of in a transaction that is in substance a forfeiture while such Shares are in fact nontransferable and subject to a substantial risk of forfeiture, then no loss or other deduction will be allowed for the amount, if any, included as compensation at the time of the transfer. Except for such limitation, if the Shares are subsequently sold, the Purchaser generally will recognize capital gain or loss (either short-term or long-term, as applicable) on such sale equal to the difference between the sales price and the tax basis of the Shares, i.e., the fair market value of the Shares (determined without regard to any lapse restriction) at the time of the purchase of Shares. Vested Shares, although subject to numerous restrictions under the Stockholders Agreement, will probably not be considered nontransferable and subject to substantial risk of forfeiture for purposes of the federal income tax laws. Accordingly, to the extent the fair market value of such Shares exceeds the amount paid therefor, such excess shall constitute compensation income to the Purchaser. 27 In general, amounts treated as compensation income to a Purchaser (including amounts treated as compensation upon the making of a Section 83(b) election) constitute wages subject to withholding of income taxes and social security taxes. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISORS AS TO THE FEDERAL AND OTHER TAX CONSEQUENCES WHICH MAY ARISE WITH RESPECT TO THE SHARES. USE OF PROCEEDS The Company will receive no proceeds from the sale of Shares by Shareholders. The cash proceeds from the sale of Shares by the Company will be used for general corporate purposes. The purpose of this registration is to facilitate the transfer of Shares among current and former associates of the Company and other Designated Management Optionees. See "PLAN OF DISTRIBUTION." DIVIDENDS Montgomery Ward will be restricted in providing funds to the Company for the payment of dividends on Common Stock under the terms of Montgomery Ward's current financing agreements. The Company has not formulated a policy with respect to payment of dividends on Common Stock after such restrictions are removed. The payment of future dividends, if any, will be dependent upon the earnings and financial requirements of the Company (which in turn are dependent on the earnings and financial requirements of Montgomery Ward) and other factors deemed relevant by its Board of Directors. The Company paid a dividend of $.25 per share of Common Stock on June 24, 1992, a dividend of $.50 per share of Common Stock on August 6, 1993 and a dividend of $.50 per share of Common Stock on June 23, 1994. 28 THE VOTING TRUST AGREEMENT This section of the Prospectus summarizes certain significant provisions of the Voting Trust Agreement in a Question and Answer format. The summary of such provisions is qualified in its entirety by reference to the copy of the Voting Trust Agreement which is attached hereto as Annex 2. QUESTIONS & ANSWERS I. GENERAL INFORMATION ABOUT THE VOTING TRUST 1.Q. WHO IS THE VOTING TRUSTEE OF THE VOTING TRUST? A. Brennan is the Voting Trustee under the Voting Trust Agreement. In the event that Brennan shall (i) cease to be a Management Shareholder, (ii) die, (iii) resign as Voting Trustee or (iv) be adjudicated incompetent (each of the foregoing being hereinafter referred to as a "Terminating Event"), the Management Shareholder who from time to time after the first such Terminating Event owns the largest number of Shares and is an associate of the Ward Group shall be the successor Voting Trustee until the first anniversary of such Terminating Event. Thereafter, the successor Voting Trustee shall consist of a committee comprised of said Management Shareholder and the two most senior officers from time to time of Montgomery Ward (other than said Management Shareholder) who are Management Shareholders. Said committee shall act by the majority of its members. So long as Brennan is serving as the Voting Trustee, he will be permitted to rescind, alter or amend, in whole or from time to time in part, any of the provisions described in this paragraph by written notice to the holders of Voting Trust Certificates. 2.Q. HOW MANY YEARS WILL THE VOTING TRUST REMAIN IN EXISTENCE? A. The Voting Trust will continue in effect until June 21, 1998 unless sooner terminated upon (i) the election of the Voting Trustee to terminate the Voting Trust Agreement by written notice to the holders of Voting Trust Certificates at any time or (ii) if there shall be no Voting Trustee, the failure of a Voting Trustee to serve or be designated for a period of 120 consecutive days. II. VOTING TRUST CERTIFICATES 3.Q. WHOSE NAME WILL APPEAR ON THE BOOKS OF THE COMPANY AS THE OWNER OF THE SHARES WHICH I PURCHASE? A. Shares deposited in the Voting Trust are registered on the books of the Company in the name of "Bernard F. Brennan, as Voting Trustee." The Voting Trustee will hold such Shares, as stockholder of record, subject to the terms and conditions of the Voting Trust Agreement. 4.Q. WHAT EVIDENCE OF MY INVESTMENT WILL I RECEIVE? A. You will receive a Voting Trust Certificate representing your ownership of a beneficial interest in the Voting Trust, which will correspond to the number of Shares purchased by you. 5.Q. OTHER THAN VOTING, WILL I HAVE ALL OF THE SAME RIGHTS, POWERS AND PRIVILEGES OF A HOLDER OF CLASS A COMMON STOCK, EVEN THOUGH MY SHARES HAVE BEEN DEPOSITED IN THE VOTING TRUST? A. Except as otherwise provided in the Voting Trust Agreement, all options, rights of purchase and other powers and privileges affecting the Shares represented by the Voting Trust Certificates attach to the Voting Trust Certificates which represent such Shares. The Stockholders' Agreement will impose significant restrictions on such rights, powers and privileges including the right to transfer such Shares or Voting Trust Certificates. See "THE STOCKHOLDERS' AGREEMENT." 29 6.Q. CAN I REQUIRE THE COMPANY TO PURCHASE MY VOTING TRUST CERTIFICATES AND MY INTEREST IN THE SHARES REPRESENTED THEREBY? A. You may require such a purchase only upon your death or total permanent disability during employment with the Ward Group as provided in the Stockholders' Agreement. III. VOTING OF SHARES BY VOTING TRUSTEE; POWERS OF VOTING TRUSTEE 7.Q. WHAT VOTING POWERS DOES THE VOTING TRUSTEE HAVE? A. Until the termination of the Voting Trust, except as noted below, the Voting Trustee has full and exclusive power and authority to vote in person or by proxy the Shares held subject to the Voting Trust at all meetings of the stockholders of the Company with no obligation to consult with any Voting Trust Certificate holders. In addition, the Voting Trustee is authorized to give written consents in lieu of voting such Shares in respect of any and all matters on which such Shares are entitled to vote, including, without limitation, the election of directors. The manner in which the Voting Trustee may exercise his powers to vote or give consents pursuant to the Voting Trust Agreement is restricted by the terms of the Stockholders' Agreement. See "THE STOCKHOLDERS' AGREEMENT-- Termination and Amendment." The Voting Trustee's power to vote and give consents pursuant to the Voting Trust Agreement is irrevocable for the term of the Voting Trust Agreement and the Voting Trustee will have the right to waive notice of any meetings of stockholders of the Company. The Voting Trustee may exercise any power or perform any act under the Voting Trust Agreement by any agent or attorney duly authorized and appointed by him. 8.Q. CAN THE VOTING TRUSTEE SERVE AS AN OFFICER OR DIRECTOR OF THE COMPANY? A. Yes. The Voting Trustee may serve as an officer or director of the Company, or in any other capacity, and receive compensation therefor. IV. RECEIPT OF CASH DIVIDENDS; ADDITIONAL SHARES 9.Q. WHAT HAPPENS IF THE COMPANY PAYS ANY CASH DIVIDENDS OR OTHER DISTRIBUTIONS ON THE SHARES HELD IN THE VOTING TRUST? A. If the Company pays any dividends on the Shares, it will pay such dividends to the Voting Trustee, as the record owner of the Shares subject to the Voting Trust. The Voting Trustee, in turn will promptly distribute such dividends among the holders of then outstanding Voting Trust Certificates in proportion to the number of Shares represented by their Voting Trust Certificates. See "RISK FACTORS--Payment of Dividends Restricted" and "DIVIDENDS." 10.Q. WHAT HAPPENS IF THE COMPANY PAYS ANY STOCK DIVIDENDS ON, OR ISSUES ADDITIONAL SHARES WITH RESPECT TO, THE SHARES HELD IN THE VOTING TRUST? A. In the event that the Voting Trustee receives any shares of stock of the Company or a successor or successors of the Company issued by way of dividend, split-up, recapitalization, reorganization, merger, consolidation or any other change or adjustment in respect of the shares held by him pursuant to the Voting Trust Agreement, the Voting Trustee will hold the stock certificates representing such additional or changed shares, to the extent that such shares have voting rights, subject to the terms of the Voting Trust Agreement. The Voting Trustee will issue Voting Trust Certificates representing such changed or additional stock certificates to the respective holders of the then outstanding Voting Trust Certificates entitled thereto. Any stock certificates of the Company or any successor or successors of the Company issued to the Voting Trustee with respect to the shares that are subject to the Voting Trust Agreement which do not have any voting rights will be delivered to the respective registered holders of then outstanding Voting Trust Certificates in proportion to the number of shares respectively represented by their Voting Trust Certificates. 30 V. VOTING TRUSTEE COMPENSATION; EXPENSES; INDEMNIFICATION 11.Q. WILL THE VOTING TRUSTEE BE COMPENSATED FOR SERVING AS VOTING TRUSTEE? A. No. The Voting Trustee will serve without compensation, but will be entitled to reimbursement from the Company (which right of reimbursement shall be secured by a lien on distributions, if any, on the Shares held therein) for expenses and charges which may be incurred in acting as Voting Trustee, including, but not limited to, costs incurred in the employment of a custodian and such other agents, attorneys and counsel as the Voting Trustee may deem necessary and proper for the carrying out of the Voting Trust Agreement and for taxes and other governmental charges paid or incurred in the transfer or issuance of any Class A Common Stock or Voting Trust Certificates or in respect of the ownership of the Class A Common Stock held by him as trustee or in respect of any dividends, distributions, or other rights in respect of such stock. 12.Q. WILL THE VOTING TRUSTEE BE LIABLE FOR ANY MATTERS ARISING OUT OF OR IN RELATION TO THE VOTING TRUST AGREEMENT? A. The Voting Trustee will not be liable by reason of any matter arising out of or in relation to the Voting Trust Agreement, except for such loss or damage as the holders of Voting Trust Certificates may suffer by reason of the Voting Trustee's willful misconduct, and, without limiting the generality of the foregoing, the Voting Trustee will not be liable for any action taken, or omitted to be taken, by the Voting Trustee in reliance upon or in conformity with the advice of counsel, or by reason of any error of judgment or mistake of law or other mistake, or for any act or omission of any agent or attorney, or for any misconstruction of the Voting Trust Agreement, or for any action believed by the Voting Trustee to be in accordance with the provisions or intent of the Voting Trust Agreement. In addition, the Voting Trustee will be indemnified by the Company from and against all liabilities, costs, claims, suits, and proceedings (including reasonable attorneys' fees) arising out of the Voting Trustee's actions pursuant to the Voting Trust Agreement, except for any acts of willful misconduct. 31 SELECTED FINANCIAL DATA The following is a summary of certain financial information relating to the Company as of and for each of the five fiscal years in the period ended January 1, 1994 and for the thirteen-week periods ended April 3, 1993 and April 2, 1994. It has been derived from the Consolidated Financial Statements of the Company. Such information for each fiscal year should be read in conjunction with the Consolidated Financial Statements and notes thereto and the reports of Arthur Andersen & Co. appearing elsewhere in this Prospectus. The summary data for the thirteen-week periods are unaudited and include, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for such periods. Certain prior period amounts have been reclassified to be comparable with current period presentation. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements and Notes thereto (including the Notes to Consolidated Condensed Financial Statements) included elsewhere in this Prospectus.
AS OF AND FOR THE ---------------------------------------------------------------- 53-WEEK 52-WEEK 13-WEEK PERIOD 52-WEEK PERIOD ENDED PERIOD PERIOD ENDED -------------------------- ENDED ENDED ----------------- DEC. 30, DEC. 29, DEC. 28, JAN. 2, JAN. 1, APRIL 3, APRIL 2, 1989 1990 1991 1993 1994 1993 1994 -------- -------- -------- ------- ------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Total Revenues.......... $5,461 $5,584 $5,654 $5,781 $6,002 $1,248 $1,318 Net Income(a)........... 151 153 135 100 101 10 10 Net Income applicable to Common Shareholders(a). 138 140 122 92 101 10 10 Net Income per Class A Common Share(a)........ 2.71 2.79 2.40 2.01 2.29 .21 .23 Total Assets............ 3,837 3,906 3,948 3,485 3,835 3,533 4,167 Short-Term Borrowings... -- -- -- -- -- 228 367 Long-Term Debt.......... 729 651 521 125 213 222 402 Obligations Under Capital Leases......... 119 111 104 95 89 94 87 Redeemable Preferred Stock.................. 90 90 90 -- -- -- -- Total Shareholders' Equity................. 287 421 520 553 607 562 626 Cash Dividends per Common Share........... -- -- -- .25 .50 -- --
- -------- (a) Amounts for the 53-week period ended January 2, 1993 are presented before cumulative effect of changes in accounting principles. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of the significant impact of these changes. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of results of operations for the Company compares the first fiscal quarter of 1994 to the first fiscal quarter of 1993, fiscal year 1993 to fiscal year 1992, and fiscal year 1992 to fiscal year 1991. Montgomery Ward is on a 52- or 53-week fiscal year basis. As a result, 1992 was a 53-week year, with 1991 and 1993 being 52-week years. All dollar amounts are in millions, and all income and expense items and gains and losses are shown before income taxes, unless specifically stated otherwise. The Company's retail business is seasonal, with one-third of the sales traditionally occurring in the fourth quarter. RESULTS OF OPERATIONS First Quarter 1994 Compared with First Quarter 1993 Consolidated net income for the first quarter of 1994 was $10, which was even with the prior year. Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $1,318 compared with $1,248 in 1993. Apparel and domestics sales increased 7% and hardlines sales increased 5%. While apparel sales benefitted from the pre-Easter selling period as a result of the earlier holiday in 1994, all categories were negatively impacted by the Los Angeles earthquake. Sales on a comparable store basis, which reflects only the stores in operation for both the first quarter of 1994 and 1993, increased 3%. Direct response marketing revenues increased $10, or 10%, to $107. The increase was primarily due to increased club membership levels. Gross margin (net sales less cost of goods sold) dollars were $285, an increase of $2, or 1%, from the first quarter of last year. This increase was due to the gross margin impact of the increased sales ($18), partially offset by the decrease in the margin rate on sales ($13) and increased occupancy costs related to new stores ($3). Benefits, losses and expenses of direct response operations increased $8, or 11% over the first quarter of last year. The increase was primarily due to increased expenses as a result of increased club memberships. Operating, selling, general and administrative expenses increased $1 from the prior year. This increase was attributable to the impact of new store openings of $11, offset by decreased advertising and other promotional costs of $4 and decreased store payroll and other costs of $6. Net interest expense increased $2, or 22%, from the prior year primarily due to increased interest expense on borrowings under the Note Purchase Agreements. The borrowings were outstanding for the entire first quarter of 1994 compared to a portion of the first quarter in 1993. Income tax expense increased by $1 or 20% due to the combined impact of the increase in pretax earnings and the increase in the effective income tax rate. The increased effective income tax rate is due to Federal income tax rate increase enacted during the third quarter of 1993. 1993 Compared with 1992 Net income applicable to common shareholders before applying the cumulative impact of accounting changes on retained earnings as of December 29, 1991 increased by $9, or 10%. Consolidated net income in 1993 was $101, an increase of $41, or 68%, from the prior year. Net income for 1992 reflects a charge of $40 for the cumulative effect of changes in accounting principles as a result of adoption of Financial Accounting Standards Board (FASB) Statements No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" and No. 109, "Accounting for Income Taxes". Income tax expense of $59 increased $9, or 18%, 33 from 1992, of which $2 was due to the impact of the increase in the federal income tax rate from 34% to 35%. Consolidated total revenues (net sales and direct response marketing revenues, including insurance) were $6,002 compared with $5,781 in 1992. Net sales increased $200, or 4%, over 1992, with an increase of $301, or 6%, from prior year net of the impact of the 53rd week in 1992. Apparel sales increased 1%, and hardlines sales experienced increases of 6%. Net of the impact of the 53rd week in 1992, apparel sales increased 2%, and hardlines sales increased 8%. Management believes merchandise sales increases reflect the positive impact of new strategic programs implemented throughout Montgomery Ward. See "BUSINESS--Merchandising-- Expansion and New Retail Formats." Sales on a comparable store basis, which reflect only the stores in operation for 1993 and 1992, increased 2%. Direct response marketing revenues increased $21, or 6%, to $400. The increase was primarily due to increased club membership levels. Gross margin dollars (net sales less cost of goods sold) were $1,377, a decrease of $7, or 1%, from last year. This decrease was primarily due to the decrease in the margin rate on sales ($57) and increased occupancy costs primarily as a result of new store openings ($10), partially offset by the gross margin impact of the increased sales ($62). The strong sales increase in Electric Avenue of 11% had an impact on the overall Company margin rate as Electric Avenue generally has lower margin rates than other merchandise categories. Benefits, losses and expenses of direct response operations increased $14, or 5%, over last year. The increase was primarily due to increased costs as a result of increased club memberships. Operating, selling, general and administrative expenses decreased $8, or 1%, from the prior year. This decrease was attributable to decreased advertising and other promotional costs of $27, decreased health care and insurance costs of $21 and increased product service income of $10. These decreases were partially offset by the impact of new store openings of $33 and the increased provision for estimated costs to be incurred in connection with the Account Purchase Agreement of $17. Net interest expense of $43 decreased $2, or 4%, from the prior year. The decrease in interest expense due to lower interest rates on borrowings was offset by decreased investment income due to lower investment balances and rates. There was no preferred stock dividend requirement in 1993 as all then- outstanding preferred stock was redeemed at face value on September 30, 1992. 1992 Compared with 1991 Consolidated net income before the cumulative effect of changes in accounting principles was $100 for 1992, compared with net income of $135 in 1991. Effective December 29, 1991, the Company adopted Financial Accounting Standards Board Statements No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("FAS 106") and No. 109, "Accounting for Income Taxes" ("FAS 109"). The cumulative effect of these changes was a charge of $40 which resulted in net income of $60 in 1992. The adoption of FAS 109 caused the effective tax rate to increase 10% or $15 in 1992. Consolidated total revenues were $5,781, compared with $5,654 in 1991. Net sales increased $108, or 2% from 1991, $101 of which was the impact of the 53rd week in 1992. Sales on a comparable store basis, which reflects only those stores in operation for all of 1992 and 1991, remained even with 1991. The Company believes "big ticket" sales such as appliances, furniture and jewelry are sensitive to general economic conditions and were negatively impacted in 1992 due to the uncertain economy. Sales results in 1992 continued to be unfavorably impacted by California's severe economic downturn. Sales in California represent a significant portion of Montgomery Ward's revenues. Further, sales of seasonal items were depressed by the unseasonably cool weather during most of 1992. In addition, automotive revenues were negatively impacted by the settlements of actions taken by various state regulatory authorities for unfair practices against a major competitor. In response to these issues, Montgomery Ward embarked on a new strategy in Electric Avenue 34 and instituted a program in Auto Express focusing on brand name tires and batteries and delivery of outstanding customer service. Direct response marketing revenues increased $19, or 5%, to $379. The increase was primarily due to increases in club memberships and dues. Gross margin dollars were $1,384, an increase of $12, or 1%, from 1991. This increase was due to the gross margin impact of the increase in sales ($34) and a decreased LIFO provision ($9). These increases were partially offset by the decrease in the margin rate on sales ($11), and increased occupancy charges primarily as a result of new store openings ($20). Benefits, losses and expenses of direct response operations increased $11, or 4%, to $286, primarily due to increased expenses of $17 as a result of increased club memberships, partially offset by the impact of reduced insurance benefit levels and other items of $6. Operating, selling, general and administrative expenses increased $56, or 5%, from 1991. This increase was primarily due to the impact of new store openings of $39, decreased income as a result of the 1991 gain on sale of the investment in Office Max, Inc. of $17, increased advertising and other promotional costs of $12 and increased operating and other administrative costs of $4. Due to improved operating efficiencies in existing stores, these increases were partially offset by decreased store payroll costs of $13 and the decreased provision for estimated costs to be incurred in connection with the Account Purchase Agreement of $3. Net interest expense decreased $11, or 20%, from the prior year due to a $24 decrease in interest expense incurred on decreased borrowings combined with favorable interest rates in 1992 and the impact of the debt restructuring which occurred in September 1992. These decreases were partially offset by a decrease in investment income due to lower investment balances combined with lower interest rates in 1992 of $13. DISCUSSION OF FINANCIAL CONDITION Montgomery Ward is the only direct subsidiary of the Company and therefore Montgomery Ward and its subsidiaries are its sole source of funds. Montgomery Ward has entered into an Amended and Restated Credit Agreement dated as of September 22, 1992, as amended, (the "Restated Credit Agreement") with various lenders. The Restated Credit Agreement, which expires September 23, 1996, provides for a revolving facility in the principal amount of $350. As of April 2, 1994, $242 is outstanding under the Restated Credit Agreement. Concurrently, Montgomery Ward also entered into a Short Term Credit Agreement dated as of September 22, 1992, as amended, (the "Short Term Agreement") with various lenders. The Short Term Agreement, which expires September 22, 1994, provides for a revolving facility in the principal amount of $200. As of April 2, 1994, $125 is outstanding under the Short Term Agreement. The Company currently anticipates that it will file a request for extension of the term of the Short Term Agreement shortly. It is also anticipated that this request for extension will be granted. Borrowings to date under the Restated Credit Agreement and the Short Term Agreement have been used for working capital purposes, to retire certain indebtedness of Montgomery Ward, to redeem outstanding Junior and Senior Preferred Stock of the Company and to partially finance the acquisition of Lechmere. The aforementioned borrowings are unsecured. During the first quarter of 1994, Montgomery Ward borrowed the entire amount available under a Term Loan Agreement dated as of November 24, 1993 with various banks (the "Term Loan Agreement"). Borrowings under the Term Loan Agreement are payable upon the fifth anniversary of the Term Loan Agreement and under the same interest rate options as the Restated Credit Agreement. This loan was used to partially finance the acquisition of Lechmere as discussed below. As of April 2, 1994, $165 was outstanding under the Term Loan Agreement. Under the Restated Credit Agreement, the Short Term Agreement and the Term Loan Agreement, Montgomery Ward may select among several interest rate options, including a rate negotiated with one or more of the various lenders. The interest rates for the aforementioned bank borrowings are based on market rates and significant increases in market interest rates will increase interest payments required. A commitment 35 fee is payable based upon the unused amount of each facility, although under certain circumstances, an additional fee may be payable to lenders not participating in a negotiated rate loan. Montgomery Ward also has Note Purchase Agreements outstanding involving the private placement of $100 of Senior Notes which have maturities of from five to twelve years from their March 1, 1993 issue date at fixed interest rates varying from 7.07% to 8.18%. The Restated Credit Agreement, the Short Term Agreement, the Term Loan Agreement (collectively, the "Agreements") and the Note Purchase Agreements impose various restrictions on Montgomery Ward, including the satisfaction of certain financial tests which include restrictions on payment of dividends. To date, Montgomery Ward has been in compliance with all such financial tests. Under the terms of the Agreements, which currently are the most restrictive of the financing agreements as to dividends, distributions and redemptions, Montgomery Ward may not pay dividends or make any other distributions to the Company or redeem any common stock of Montgomery Ward in excess of (1) $50 on a cumulative basis, plus (2) 50% of Consolidated Net Income of Montgomery Ward (as defined in the Agreements) after December 28, 1991, plus (3) $90, which represents a distribution made by Montgomery Ward for the purpose of redeeming the preferred stock of the Company outstanding on September 30, 1992, plus (4) capital contributions received by Montgomery Ward after December 28, 1991, plus (5) net proceeds received by Montgomery Ward from (a) the issuance of capital stock including treasury stock but excluding Debt-Like Preferred Stock (as defined in the Agreements), or (b) any indebtedness which is converted into shares of capital stock other than Debt-Like Preferred Stock, after December 28, 1991, plus (6) an adjustment of $45 for 1994 through 1996, $30 for 1997 and $15 for 1998. Montgomery Ward acquired in a merger transaction all the stock of LMR, which owns 100% of the stock of Lechmere, on March 30, 1994. The aggregate purchase price was comprised of an estimated price of $113 and a contingent purchase price payable in 1995 of up to $20 in cash and the issuance of up to 400,000 shares of Class A Common Stock, Series 1 (or at the option of Montgomery Ward, up to 400,000 shares of Class A Common Stock, Series 3). The exact amount, if any, of the contingent price to be paid is dependent on Lechmere achieving or exceeding a specified gross margin amount during the period commencing February 27, 1994 and ending February 25, 1995. The closing price included a $10 promissory note (the "Note") of Montgomery Ward, which bears interest at a rate of 4.87% per annum. Seventy-five percent of the accrued interest on and principal of the Note are payable 540 days after the date of the Note and the balance is payable three years after the date of the Note. The Note, which is secured by a standby letter of credit, is to be reduced upon the occurrence of certain specified circumstances. As part of the closing, Montgomery Ward advanced approximately $88 and assumed $3 of obligations to enable Lechmere to retire its outstanding bank debt and subordinated debt. The purchase of and advances to Lechmere were financed by the proceeds from borrowings under the Agreements. On April 27, 1994, the Company issued 750 shares of a new series of Senior Preferred Stock to GE Capital in exchange for $75 in cash. See "DESCRIPTION OF EQUITY SECURITIES--Senior Preferred Stock." The Company used the proceeds to acquire preferred stock of Montgomery Ward (the "Montgomery Ward Preferred") from Montgomery Ward. The Montgomery Ward Preferred has terms substantially the same as the terms of the Senior Preferred Stock, with the exceptions that (i) Montgomery Ward will be required to redeem the Montgomery Ward Preferred upon two months prior written notice from the Company, provided that such redemption cannot occur until the first day following the fifteenth anniversary of the issuance of the Montgomery Ward Preferred; (ii) the holders of the Montgomery Ward Preferred will not have any voting rights; and (iii) the terms of the Montgomery Ward Preferred will specifically provide that (A) the restrictions on payments to holders of capital stock of Montgomery Ward which are junior to the Montgomery Ward Preferred shall not apply to payments made pursuant to any tax sharing or tax allocation arrangement and (B) without limitation, the Montgomery Ward Preferred is subordinate and 36 junior in right of payment to indebtedness for borrowed money of Montgomery Ward upon the occurrence and continuance of an event of default, as defined in the Agreements. Montgomery Ward used the proceeds from the issuance of the Montgomery Ward Preferred to reduce borrowings under the Restated Credit Agreement and the Short Term Agreement. The Montgomery Ward Preferred constitutes Debt-Like Preferred Stock for purposes of the dividend restrictions under the Agreements. The Company has repurchased 3,987,550 Class A Shares held by certain former officers of the Company, Montgomery Ward and Signature and their permitted transferees by making cash payments and issuing installment notes in the aggregate of approximately $44. As of July 2, 1994, the outstanding balance of these notes was $29. See Note 15 to the Consolidated Financial Statements. These installment notes bear interest at varying rates, are payable over a multi-year period (generally three to five years) and are secured by Voting Trust Certificates representing shares of Common Stock, the fair market value of which is equal to the outstanding principal amount under each note. Under the Agreements, Montgomery Ward expects to be able to advance the Company sufficient funds to allow the Company to make the required installment payments in 1994. Currently available external sources of funds include $550 in multi-year revolving loan commitments which were obtained in September 1992, of which $200 will expire on September 22, 1994 and $350 will expire on September 23, 1996. During 1993, the average daily balance of borrowings under these commitments was $248. All such borrowings were repaid as of January 1, 1994. As of April 2, 1994, an aggregate amount of $367 of borrowings was outstanding under these commitments. For the first quarter of 1994, the weighted average interest rate applicable to borrowings under the Restated Credit Agreement and the Short Term Agreement was 3.8%. Under the laws and regulations applicable to insurance companies, some subsidiaries of Signature are limited in the amount of dividends they may pay. For information concerning limitations on the amount of dividends Signature may pay, see Note 17 to the Consolidated Financial Statements. During 1993, Signature paid dividends aggregating $35. Future cash needs are expected to be provided by ongoing operations, the sale of customer receivables to Montgomery Ward Credit, borrowings under the Restated Credit Agreement and the Short Term Agreement, and the disposition of capital assets related to facility closings. See "BUSINESS--Account Purchase Agreement" for a discussion of the terms of the sales of customer receivables by Montgomery Ward to Montgomery Ward Credit. Montgomery Ward regularly reviews opportunities for acquisitions and joint ventures and regards acquisitions and joint ventures as a possible source for future growth. If any additional acquisitions are made in the future, indebtedness may be increased. Montgomery Ward's capital expenditures of $142 for 1993 were primarily related to opening 14 new stores, closing six stores, relocating two stores and implementing specialty-store conversion strategies in conventional retail stores and various merchandise fixture and presentation programs. Capital expenditures of $12 during the first three months of 1994 were primarily related to expenditures for opening one full-line retail store and several merchandise fixture and presentation programs. Montgomery Ward is not contractually committed to spend all of the capital appropriations unexpended at January 1, 1994, but generally expects to do so.
1993 1992 1991 ---- ---- ---- Total Capital Expenditures............................. $142 $146 $128 Capital appropriations authorized during the year...... $149 $154 $180 Cancellations of prior year's appropriations........... $(23) $(62) $(55) Unexpended capital appropriations at year-end.......... $143 $159 $213
The Company paid a dividend of $.25 per share of Common Stock on June 24, 1992, a dividend of $.50 per share of Common Stock on August 6, 1993 and a dividend of $.50 per share of Common Stock on June 23, 1994. 37 BUSINESS GENERAL The Company was incorporated in 1988 and does business through Montgomery Ward and its subsidiaries, which are engaged in retail merchandising and direct response marketing (including insurance) in the United States. See Note 22 to the Consolidated Financial Statements for financial information regarding these segments. Founded in 1872 and incorporated in Illinois in 1968, Montgomery Ward is one of the nation's largest retail merchandising organizations. As of January 1, 1994, Montgomery Ward operated 364 retail stores in 39 states with approximately 28 million square feet of selling space. In addition, Montgomery Ward operated 17 liquidation centers which sell overstock merchandise, 21 distribution facilities and 117 product service centers. Montgomery Ward's retail operations are supported by its corporate buying division which has its principal office in Chicago, and includes foreign purchasing offices in Italy, Hong Kong, Taiwan, Japan, Indonesia, Thailand, Singapore and Korea. In addition to its buying staff, the corporate buying division employs designers and technical teams to ensure quality control of its merchandise. Montgomery Ward offers life and health insurance, revolving credit insurance, club products and other consumer services through the Signature Group. Signature is one of the largest direct marketing companies in the United States. See "Signature Financial/Marketing, Inc." MERCHANDISING The Company conducts its merchandising operations through Montgomery Ward and Montgomery Ward's subsidiary Lechmere. Montgomery Ward's retail business, including Lechmere, is seasonal, with one-third of the sales traditionally occurring in the fourth quarter. The results of Montgomery Ward's operations also are subject to changes in consumer demand associated with general economic conditions, which is especially true with respect to demand for durable goods and other "big ticket" merchandise. Specialty Store Strategy. Montgomery Ward offers a broad range of quality national brands and proprietary brands as well as its own private label goods in the following specialty categories:
PRODUCT CATEGORY SPECIALTY STORE NAME ---------------- -------------------- Appliances and electronics... Electric Avenue Home furnishings............. Home Ideas, including Rooms & More Automotive................... Auto Express Apparel...................... The Apparel Store, including The Kids Store Jewelry...................... Gold 'N Gems
Each specialty concept combines a focus on specific customer needs, a dominant merchandise assortment, updated presentation and marketing strategies. During 1993, several programs were initiated to generate future sales increases as well as to improve profitability. Electric Avenue. Electric Avenue has a significant national brand name presence including Sony electronics, Maytag appliances, General Electric electronics and appliances, Panasonic products and Nintendo and Sega games. The Home Office assortment has been expanded and now includes IBM, Apple, Packard Bell and Compaq products. To complement the national brands, Montgomery Ward offers electronics and appliances featuring the Admiral name and electronics featuring the Bell & Howell name under trademark licensing agreements. 38 Rooms & More. Montgomery Ward is one of the three largest furniture retailers in the United States. The Rooms & More strategy initiated in 1993 features presentation of grouped and accessorized settings. The groups offer a full array of styles and simplify coordinating home furnishings for customers. For added customer appeal, tiered discounts are offered on the purchase of multiple pieces. Bassett, Simmons, La-Z-Boy and Lane are part of a broad name brand selection. Montgomery Ward is dominant in sales of brand name mattresses and is one of the few retailers who carry the four "S's" in bedding (Sealy, Simmons, Serta and Spring Air). Auto Express. Auto Express offers brand name tires such as Michelin, B.F. Goodrich and Bridgestone as well as private label tires under the Road Tamer name. Montgomery Ward sells replacement parts and accessories including NAPA auto parts, Monroe shock absorbers and Champion batteries. In addition to the sale of tires and parts, Montgomery Ward offers prompt installation and minor repair service and promotes services such as "59 minute installation of tires". The Apparel Store. Significant progress has recently been made in Montgomery Ward's apparel offering through acquisition and expansion of "department store" brand names such as Lee, Bugle Boy, Danskin, Villager, Cherokee, Ship 'N Shore Sport and Botany 500. During 1993, Montgomery Ward purchased the rights to the Ship 'N Shore trademark. A product development organization formed in late 1992 continues to develop proprietary products such as Evenflo. This product sourcing organization coordinates activities among Montgomery Ward's import organization, foreign buying offices, quality control and logistics functions. Distribution. The Company considers logistics to be important to its operations and continued to invest in logistics during 1993. A state-of-the-art distribution center in Tampa, Florida was opened to service Montgomery Ward's eastern territory. The new Tampa facility, along with the facilities opened in Baltimore, Maryland in 1992 and Chino, California in 1991, incorporates new distribution management systems which are more dynamic in tracking merchandise and facilitating inventory planning and customer service. The Company opened a new distribution facility in Phoenix, Arizona in May 1994. Management. In order to execute Montgomery Ward's strategic initiatives for expansion through new market areas, new retail formats and expansion of name brands, Bernard W. Andrews rejoined the senior management team in early 1994 as President and Chief Operating Officer of Montgomery Ward, and Robert F. Connolly rejoined as Executive Vice President, Apparel. See "MANAGEMENT-- Directors and Executive Officers." Expansion and New Retail Formats. New Stores. The Company has opened 67 stores over the last six years. These new stores represent 18% of the Company's total stores. The considerable cash flow generated by Montgomery Ward's operations and the real estate opportunities resulting from consolidation in the department store industry have allowed the Company to greatly improve its locations and position the chain for future growth. Montgomery Ward anticipates opening a number of new full-line stores which encompass the specialty store strategies. Several of the new stores will be opened in or near existing Montgomery Ward markets to further leverage advertising expenditures, existing distribution facilities and the corporate administrative structure. Lechmere. Montgomery Ward acquired Lechmere on March 30, 1994. As of that date, Lechmere operated 24 superstores located in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York offering extensive selections of hardline merchandise in seven major home-oriented product categories. Lechmere stores, which average approximately 50,000 square feet of selling space, carry a broad range of 39 quality brand name products in the following categories: consumer electronics, home office and entertainment software, appliances, housewares, photography, and recreation and leisure. Lechmere has built a strong customer franchise and is believed to be the market share leader in the greater Boston area for many of the products it sells. Lechmere offers a comprehensive selection of nationally recognized brands in each of its seven major product categories. It carries a wide range of price points for each product, with its greatest depth in more fully featured products. It also stocks a wide variety of accessories and other complementary products. Like Montgomery Ward, Lechmere has a strong value orientation in its pricing strategy and customer service. Lechmere's merchandising format and strategies have enabled it to perform well and add stores during a recessionary period in the Northeast. Lechmere's revenues grew at a 10% compound annual rate over the last three years, reaching $824 million in fiscal 1993. Lechmere opened six new stores over the last three years, increasing its store base by 33%. In addition to investments in new stores and upgrades of existing stores, Lechmere made significant investments in management information systems and advertising production systems. Montgomery Ward's acquisition of Lechmere will add substantial volume to a highly successful specialty segment of the company's business. Lechmere's strong regional presence will significantly improve Montgomery Ward's market share in an area where Montgomery Ward stores were previously located only on the perimeter. Since Electric Avenue and Lechmere carry many of the same key brand names, the acquisition will enhance buying leverage. Yet, Lechmere's greater emphasis in upper end price points will broaden the company's targeted consumer group and provide alternative specialty concepts for future expansion. Leverage opportunities resulting from Montgomery Ward's acquisition of Lechmere should reduce combined expenses. Electric Avenue & More. Montgomery Ward has announced plans to open six Electric Avenue & More stores in 1994. The new Electric Avenue & More stores combine the company's electronics, appliances and home furnishings specialty businesses into a home specialty store which will be introduced in mid-size markets with populations of 150,000 to 200,000, where full-line stores have not traditionally operated and in multi-store markets in which Montgomery Ward cannot find suitable locations for additional full-line stores. Each store will have at least 45,000 square feet of selling space and feature presentation of complete rooms of furniture, home accessories, electronics and major appliances. Consumers will be offered dominant assortments of a broad range of name brand and proprietary brand merchandise. In the mid-sized markets, more limited competition combined with Montgomery Ward's buying power and low operating costs present the opportunity to offer consumers exceptional values on home products and generate margins attractive to the company. Acquisitions. Montgomery Ward considers acquisitions, particularly those that would have synergies with existing businesses, to be an area of growth for the Company and is actively seeking such opportunities. On March 30, 1994, Montgomery Ward acquired Lechmere. DIRECT MARKETING Montgomery Ward offers life and health insurance, revolving credit insurance, club products and other consumer services through its subsidiary, Signature. Signature is one of the largest direct marketing companies in the United States. Signature's club products include auto clubs (one of which is the third largest in the United States), a credit card registration plan, a home protection plan, a senior citizen club, travel services, a dining card, a dental services plan and a legal services plan (the largest of its kind in the United States). Signature solicits business primarily through direct mail, telemarketing and customer statement inserts by segmenting lists and targeting specific customers. During 1993, Signature sent out over 300 million pieces of mail and made approximately 50 million outbound calls from its 12 telemarketing centers located throughout the United 40 States. Customer service is a key to success in this business. Accordingly, Signature operates a 24-hour a day, 365-day a year service for its products for which emergency help (e.g., emergency road service) is a necessary component. Signature also provides other credit card enhancement programs to Montgomery Ward's credit cardholders, who comprise the majority of Signature's customers. Signature has a total of 8.2 million promotable accounts on file to which it markets its products. These accounts, which are its best targets for direct marketing, provide Signature with significant marketing opportunities. The size and customer dynamics of the Montgomery Ward credit cardholder file have allowed Signature to attain economies of scale which have lowered its marketing and operating costs. Effective April 1, 1994, Signature acquired Greater California Dental Plan Services, Inc. and National Dental Services, Inc., which are dental referral services. Through acquisition of these companies, Signature will be able to expand its customer base into new demographic and geographic markets. Signature also markets its products and services to the customers of more than 50 other entities providing an additional 28.2 million promotable accounts, including some of the nation's largest financial institutions, oil companies and retailers. Clients include Citibank, American Express and Mobil Oil Company. With its economies of scale, Signature can offer its products and services to customers of its third party clients at competitive values and pay third party clients attractive commissions. Revenues from third party clients were 31% of Signature's total volume in 1993. Under the terms of a letter agreement dated June 24, 1988 among Signature, Montgomery Ward Credit and Montgomery Ward, Montgomery Ward Credit purchases the customer accounts receivable of Signature on terms similar to those contained in the Account Purchase Agreement, except for certain fees. In 1993, approximately $5 million was paid by Signature to Montgomery Ward Credit for administrative services provided by Montgomery Ward Credit in connection with Signature products. The term of the servicing agreement will continue until December 31, 2004 and from year to year thereafter subject to termination upon ten years prior written notice effective on December 31, 2004 or any December 31 thereafter. See Note 17 to the Consolidated Financial Statements for restrictions on dividends which may be paid by the insurance subsidiaries of Signature. SPECIALTY CATALOG In 1991, Montgomery Ward, through two newly formed subsidiaries, became a 50% partner in Montgomery Ward Direct L.P. ("MW Direct"), a specialty catalog business. The other 50% partners are subsidiaries of Fingerhut Companies, Inc. MW Direct generated $116 million in revenues in 1993, compared to $46 million in 1992, an increase of 152%. These revenues are not included in the Company's revenues. COMPETITION AND REGULATION The sale of merchandise by Montgomery Ward, directly and through Lechmere, is conducted under highly competitive conditions. Buying and selling are each done in open competitive markets. Montgomery Ward's stores are in competition with specialty stores, department stores and other types of retail outlets in the areas in which they operate. The Company believes that dominance of merchandise assortments, brand names, competitive pricing and availability of services such as credit, delivery, installation and repair differentiate competitors. The Company believes that it is able to compete in every respect despite strong competitive pressures. To meet competition, Montgomery Ward is continuously striving to improve the efficiency and effectiveness of its operations and to modernize and specialize its facilities. Signature's insurance operations are a highly regulated business conducted under highly competitive conditions. Insurance companies operate pursuant to specific state statutes as well as rules and regulations promulgated by various state insurance departments and are required to file reports with such agencies at least quarterly. 41 The requirements of environmental protection laws and regulations have not had a material effect upon Montgomery Ward's operations. Compliance may, in certain cases, lengthen the lead time of expansion plans and could increase construction and operating costs. ACCOUNT PURCHASE AGREEMENT Montgomery Ward extends credit to its customers under an open-end revolving credit plan. Montgomery Ward's private label credit card sales were 57.4% and 54.0% of total sales for 1993 and 1992, respectively. Bankcard sales were an additional 13.3% and 13.8% of total sales for 1993 and 1992, respectively. Montgomery Ward finances the receivables under its revolving credit plan by the sale of such receivables to Montgomery Ward Credit Corporation ("Montgomery Ward Credit"), a Delaware corporation which is a wholly-owned subsidiary of GE Capital. In June, 1988, Montgomery Ward and Montgomery Ward Credit entered into an Account Purchase Agreement (the "Account Purchase Agreement") pursuant to which Montgomery Ward Credit purchases receivables from time to time and provides services to Montgomery Ward. Under this agreement, Montgomery Ward Credit has the exclusive right to operate the Montgomery Ward private label credit card system and the obligation to purchase for their face value (and Montgomery Ward is obligated to sell) all the receivables generated by the Montgomery Ward private label credit card system including those generated through MW Direct, up to $6 billion at any time outstanding. If Montgomery Ward desires to sell its customer receivables to Montgomery Ward Credit at a time when Montgomery Ward Credit owns $6 billion or more of such receivables, alternative arrangements, such as the sale of receivables to banks or other financial institutions, would be required unless Montgomery Ward Credit agrees to purchase the excess. As of January 1, 1994, there were $4.9 billion of Montgomery Ward private label credit card receivables owned by Montgomery Ward Credit. Pursuant to the Account Purchase Agreement, Montgomery Ward Credit bears certain credit promotion expenses, while Montgomery Ward retains certain specified in-store service responsibilities with respect to credit operations. Decisions regarding certain credit matters are determined by a management committee with representatives from each party. Under the Account Purchase Agreement, Montgomery Ward is required to pay Montgomery Ward Credit the excess interest costs on a monthly basis if a blended interest rate applicable to Montgomery Ward Credit's finance costs with respect to the receivables exceeds 10% per annum. To date, the blended interest rate has been less than 10%. The risk of credit losses is shared by Montgomery Ward and Montgomery Ward Credit. Montgomery Ward Credit bears the risk up to 3.9% of average gross receivables (the prime layer), Montgomery Ward bears the risk in excess of such prime layer up to 5%, Montgomery Ward and Montgomery Ward Credit equally share losses between 5% and 8%, and Montgomery Ward Credit bears the losses in excess of 8% of average gross receivables. Actual credit losses decreased to 5.5% of average gross receivables for 1993, from the 5.8% experienced in 1992. The decrease in credit losses was caused by an 11.9% decrease in bankruptcy charge- offs. However, the significance of Montgomery Ward's California customer base and the economic difficulties experienced in that region contributed to a significant portion of the charge-offs. Under the terms of the Account Purchase Agreement, a portion of Montgomery Ward's 1991 liability for credit losses and, at Montgomery Ward's election, its liabilities for credit losses for 1992 through 1997 are payable to Montgomery Ward Credit in early 1998 with interest payable at a rate similar to rates paid on comparable borrowings of Montgomery Ward. In early 1994, the Account Purchase Agreement was amended to incorporate the 1997 liabilities. In exchange for Montgomery Ward's agreement to allow Montgomery Ward Credit to increase finance charge rates in selected states, Montgomery Ward receives a share of incremental finance charges resulting from such increases, which is available for offset against amounts due for credit losses and earns interest at the same rate. Incremental finance charges are generated only on purchases subsequent to the date such finance charge rates are increased. The Company has executed notes for the credit losses which totalled $108 million at the end of 1993. The finance charge offset for 1993 was $9 42 million. Under the agreement, the notes payable to Montgomery Ward Credit are limited to $300 million at any time, with any excess to be paid currently in cash. The Company does not expect credit losses for the period through 1997 to exceed the $300 million limitation. In the event that, due to the increase in finance charge rates, any refunds are required to be made, Montgomery Ward and Montgomery Ward Credit have agreed to share the financial risk. Legislation has from time to time been introduced in certain states which, if enacted, may require rescinding all or a portion of such rate increases, in which case, Montgomery Ward's share of rate increases may be substantially reduced. See Note 3 to the Consolidated Financial Statements. Montgomery Ward Credit has the right of first refusal to implement certain new financing programs proposed by Montgomery Ward. The Account Purchase Agreement will be in effect until December 31, 2004 and thereafter from year to year unless either party gives the other not less than ten years prior notice of its election to terminate. Except upon the occurrence of certain events of default, the Account Purchase Agreement may not be terminated by either party prior to December 31, 2004. GE Capital has guaranteed Montgomery Ward Credit's obligations under the Account Purchase Agreement. LEGAL PROCEEDINGS The Company and its subsidiaries are engaged in various litigation matters and have a number of unresolved claims. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to have a material impact on the financial condition or the results of operations of the Company. In 1979, a suit entitled "United States v. Midwest Solvent Recovery, Inc., et. al." (Civil Action Number H-79-556) was initiated by the United States Department of Justice on behalf of the Environmental Protection Agency in the U.S. District Court for the Northern District of Indiana, Hammond District and an Amended Complaint was filed in January 1984. This suit is against Standard T Chemical Company, Inc., a Delaware corporation and wholly-owned subsidiary of Montgomery Ward ("Standard T"), and others involving two waste disposal sites and seeks reimbursement for the cost of surface clean-up, investigation studies concerning possible contamination of the soil and ground water and remedial action. In January 1990, the United States filed a second Amended Complaint seeking inter alia, treble damages and monetary sanctions. Standard T has signed a consent decree, entered by the Court, whereby it was obligated to provide a financial assurance up to $3,370,000 for remediation of the site and was assessed civil penalties in the amount of $74,000. The Company currently anticipates that its obligation will not exceed those amounts. In 1985, the New York Environmental Protection Agency brought an action for remediation of a site in Staten Island, New York against the owner of the property. The owner asserted that Montgomery Ward and Standard T, among others, generated wastes that were disposed of at the site. Standard T is in the process of completing the cleanup of this site and has purchased the site from the owner for $1,450,000. In February 1986, Standard T, along with approximately 330 other companies, was notified by the United States Environmental Protection Agency that the agency was mandating a remediation of the contamination of the American Chemical Services, Inc. (A.C.S.) site in Griffith, Indiana under authority vested in it by the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Standard T and the Montgomery Ward paint factory were each identified as a Potentially Responsible Party (a "PRP"), under the terms of the Act because of their alleged status as generators of hazardous waste which ultimately was disposed of at the A.C.S. site. The Company will pay its proportionate share of the costs of the studies, and may ultimately pay a share of the costs of abating the contamination of the A.C.S. property. These costs cannot be estimated with any degree of accuracy at this time. Thus, the Company is currently not in a position to estimate the range or amount of potential exposure in this matter with a high degree of certainty. 43 On or about December 10, 1990, the Company was served with a Complaint and Notice of Opportunity for Hearing (the "Complaint"), alleging certain violations by the Company of the Federal Toxic Substances Control Act. The Complaint contains twenty-two counts and alleges that the Company violated various regulations concerning the use, disposal, storage and marking of polychlorinated biphenyls (PCBs) at a warehouse facility located in Kansas City, Missouri. The Complaint seeks a total civil penalty of $.3 million. Standard T and Montgomery Ward are also involved in various stages with several other sites where they have been notified or sued as a PRP. ASSOCIATES At January 1, 1994, Montgomery Ward employed the equivalent of approximately 51,350 full-time associates. During certain seasons, temporary associates are added and peak employment is approximately 63,900 associates during the Christmas season. Approximately 2,800 associates are covered by various collective bargaining agreements expiring at various times during the next three years. Montgomery Ward has experienced no major labor-related interruption or curtailment of operations during the last 15 years and considers its labor relations to be good. PROPERTIES At April 2, 1994, the Company owned or leased 498 retail, distribution and other operating facilities. The Company's properties are located throughout the continental United States and cover approximately 57 million square feet. These properties are summarized as follows:
NUMBER OF APPROXIMATE TOTAL USE LOCATIONS SQUARE FEET - --- --------- ----------------- Montgomery Ward Retail Stores: Full Line......................................... 337 43,714,000 Limited Line...................................... 29 1,139,000 Lechmere Retail Stores.............................. 24 2,192,000 Corporate Office Complex............................ 1 2,975,000 Miscellaneous Operating Locations................... 107 7,477,000 --- ---------- Total Locations................................. 498 57,497,000 === ==========
Owned and leased retail stores include approximately 28 million square feet of selling space and 19 million square feet devoted to storage, office and related uses. Miscellaneous operating locations include warehouses, office buildings and distribution centers, but exclude vacant land parcels and properties held for disposition. See Note 13 to the Consolidated Financial Statements for information with respect to leased properties. 44 The nationwide scope of Montgomery Ward's operations helps minimize the impact of changes in the economies of specific regions on the overall performance of its retail stores and allows Montgomery Ward to merchandise to a variety of demographic profiles. The regional distribution of Montgomery Ward retail stores as of April 2, 1994 is indicated in the following table:
STATE TOTAL ----- ----- Alabama............................................................. 3 Arizona............................................................. 11 Arkansas............................................................ 5 California.......................................................... 57 Colorado............................................................ 13 Florida............................................................. 21 Georgia............................................................. 3 Idaho............................................................... 1 Illinois............................................................ 36 Indiana............................................................. 8 Iowa................................................................ 5 Kansas.............................................................. 6 Kentucky............................................................ 1 Louisiana........................................................... 6 Maryland............................................................ 16 Michigan............................................................ 15 Minnesota........................................................... 10 Missouri............................................................ 10 Montana............................................................. 2 Nebraska............................................................ 2 Nevada.............................................................. 3 New Hampshire....................................................... 3 New Mexico.......................................................... 3 New York............................................................ 12 North Carolina...................................................... 3 North Dakota........................................................ 1 Ohio................................................................ 5 Oklahoma............................................................ 6 Oregon.............................................................. 8 Pennsylvania........................................................ 14 South Carolina...................................................... 2 Tennessee........................................................... 2 Texas............................................................... 44 Vermont............................................................. 1 Virginia............................................................ 18 Washington.......................................................... 3 West Virginia....................................................... 5 Wisconsin........................................................... 1 Wyoming............................................................. 1 --- 366 ===
Lechmere's stores are located in the northeast United States, an area in which Montgomery Ward stores have not traditionally operated. As of April 2, 1994, there were twelve Lechmere stores in Massachusetts, six in New York, three in New Hampshire, two in Connecticut and one in Rhode Island. 45 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Board of Directors of the Company consists of nine persons, five of whom are designated by Brennan and four of whom are designated by GE Capital. Subject to the right of those parties to continue to designate directors as stated, directors are elected annually by the Company's stockholders at each annual meeting, and serve until the next annual meeting and until their successors are elected and shall have qualified. The party designated above as having the right to designate a director has the right to fill a vacancy in that directorship and the right to remove, with or without a cause, a director who has been so designated. In certain cases, GE Capital's right to designate directors will be reduced or terminated. Under certain circumstances, the holders of Senior Preferred Stock will have the right to elect an additional director to the Board of Directors. See "THE STOCKHOLDERS AGREEMENT" and "DESCRIPTION OF EQUITY SECURITIES--Common Stock--Voting Rights, and--Senior Preferred Stock--Voting Rights." Officers of the Company serve at the discretion of its Board of Directors. Officers of Montgomery Ward serve at the discretion of its Board of Directors and all the directors of the Company are currently serving as directors of Montgomery Ward. The names and ages of the directors and executive officers of the Company as of July 2, 1994 are:
NAME AGE POSITION ---- --- -------- Bernard F. Brennan............ 55 Chairman and Chief Executive Officer and a Director(1) Richard Bergel................ 59 Vice Chairman and a Director(1) Bernard W. Andrews............ 52 President and a Director(1) Spencer H. Heine.............. 51 Executive Vice President, Secretary and General Counsel and a Director(1) Robert A. Kasenter............ 47 Executive Vice President Edwin G. Pohlmann............. 47 Executive Vice President Robert R. Schoeberl........... 58 Executive Vice President John L. Workman............... 42 Executive Vice President, Chief Financial Officer and Assistant Secretary Tommy T. Cato................. 52 Executive Vice President--(on leave of absence) Richard C. Rusthoven.......... 53 Executive Vice President--(on leave of absence) Carol J. Harms................ 40 Vice President and Treasurer Robert F. Connolly............ 50 Executive Vice President, Apparel of Montgomery Ward Gene C. McCaffrey............. 48 Executive Vice President, Marketing of Montgomery Ward G. Joseph Reddington.......... 52 Chairman and Chief Executive Officer of Signature Myron Lieberman............... 63 Director(1) Silas S. Cathcart............. 68 Director(2) David D. Ekedahl.............. 59 Director(2) Denis J. Nayden............... 40 Director(2) James A. Parke................ 48 Director(2)
- -------- (1) Designated by Bernard F. Brennan. (2) Designated by GE Capital. 46 Mr. Brennan has been Chief Executive Officer and a director of the Company since February 9, 1988, has been Chairman since June 17, 1988 and was President from February 9, 1988 through September 10, 1992. Mr. Brennan has been Chief Executive Officer and a director of Montgomery Ward since May 13, 1985 and became Chairman of Montgomery Ward on June 24, 1988. He served as President of Montgomery Ward from May 13, 1985 through September 10, 1992. Mr. Brennan has been a director of Itel Corporation since 1988 and a director of ANTEC Corporation since October 1993. Mr. Bergel has been Vice Chairman of the Company since June 25, 1993. Prior thereto, he was an Executive Vice President of the Company from June 17, 1988 through June 24, 1993. Mr. Bergel has been a director of the Company since June 24, 1988. Mr. Bergel has been Vice Chairman--Operations and Catalog of Montgomery Ward since June 25, 1993 and served as Executive Vice President and President of Specialty Catalogs of Montgomery Ward from June 16, 1991 through June 24, 1993. Prior thereto, he was President of Store Operations of Montgomery Ward since March 3, 1989, and was Executive Vice President-- Operations of Montgomery Ward from December 16, 1987 through March 2, 1989. Mr. Bergel has served as Chief Executive Officer of Lechmere since March 30, 1994. From October 21, 1991 through March 29, 1994, Mr. Bergel served as Chief Executive Officer of MW Direct. Mr. Bergel also serves as a director of MW Direct. Mr. Andrews has been President, Chief Operating Officer and a director of the Company since January 28, 1994. Mr. Andrews has been President and Chief Operating Officer of Montgomery Ward since January 28, 1994. Prior thereto he served as Executive Vice President of Operations of Circuit City Stores, Incorporated ("Circuit City") from March 1991 to January 1994, and Executive Vice President of Marketing of Circuit City from October 1990 to February 1991. He was Executive Vice President and President of Marketing of Montgomery Ward from May 18, 1990 through June 16, 1990 and Executive Vice President and President of Home and Automotive Group from August 18, 1986 to May 17, 1990. Mr. Heine has been an Executive Vice President, Secretary and General Counsel of the Company since September 30, 1991 and a director since May 15, 1992. Prior thereto, he was Senior Vice President, Secretary and General Counsel of the Company from June 17, 1988 through September 29, 1991. Mr. Heine has been Executive Vice President, Legal and Financial Services of Montgomery Ward since September 30, 1991. He served as Senior Vice President--Legal and Real Estate of Montgomery Ward from March 28, 1990 through September 29, 1991 and was named a Senior Vice President of Montgomery Ward on March 1, 1988. Mr. Heine served as Chairman and Chief Executive Officer of Signature from March 8, 1993 until April 11, 1994. Prior thereto, he also served as President of Signature from September 30, 1991. Mr. Kasenter has been an Executive Vice President of the Company since February 21, 1992. Prior thereto, he was a Senior Vice President of the Company since June 17, 1988. Mr. Kasenter has served as Executive Vice President, Human Resources of Montgomery Ward since January 27, 1992 and was Senior Vice President--Human Resources and Customer Satisfaction of Montgomery Ward from June 23, 1988 to January 26, 1992. Mr. Pohlmann has been an Executive Vice President since September 30, 1991 and served as Chief Financial Officer of the Company from September 30, 1991 to August 30, 1992. Prior thereto, he was Senior Vice President and Chief Accounting Officer from May 18, 1990 to September 29, 1991, and Senior Vice President--Finance from June 17, 1988 through May 17, 1990. Mr. Pohlmann has been Executive Vice President, Merchandise and Store Operations of Montgomery Ward since November 16, 1993. Prior thereto, he was Executive Vice President, Merchandise Control from June 25, 1993 through November 15, 1993, Executive Vice President, Stores and Finance from January 27, 1992 through June 24, 1993 and prior thereto, Executive Vice President and Chief Financial Officer of Montgomery Ward since September 30, 1991. He served as Senior Vice President-- Store Operations of Montgomery Ward from June 16, 1991 through September 29, 1991, and was Senior Vice President--Finance of Montgomery Ward from March 1, 1988 through June 15, 1991. 47 Mr. Schoeberl has been an Executive Vice President of the Company since June 24, 1992. Prior thereto, he served as Vice President from June 24, 1988 to June 23, 1992. Mr. Schoeberl has been Executive Vice President--Home and Auto of Montgomery Ward since September 9, 1993, Executive Vice President--Electric Avenue and Auto Express from June 24, 1992 through September 8, 1993, Senior Vice President--Electric Avenue from February 20, 1992 to June 23, 1992 and Senior Vice President--Auto Express from July 3, 1991 to February 19, 1992. Prior thereto, he served as Vice President and General Merchandise Manager, Auto Express from May 18, 1990 to July 2, 1991 and Vice President and General Merchandise Manager, Auto Express and Four Seasons from June 4, 1989 to May 17, 1990. Mr. Workman has been Executive Vice President, Chief Financial Officer and Assistant Secretary of the Company since January 28, 1994. Prior thereto, he served as Senior Vice President, Chief Financial Officer and Assistant Secretary of the Company since August 31, 1992 and Vice President and Assistant Secretary of the Company since May 15, 1992. Mr. Workman has been Executive Vice President and Chief Financial Officer of Montgomery Ward since January 28, 1994 and served as Senior Vice President and Chief Financial Officer from August 31, 1992 to January 27, 1994. Prior thereto, he served as Vice President and Corporate Controller from January 16, 1991 through August 30, 1992 and Corporate Controller from August 2, 1988 through January 15, 1991. Mr. Rusthoven served as an Executive Vice President of the Company from May 15, 1992 until his current leave of absence which began on November 1, 1992. Mr. Rusthoven was Executive Vice President--Apparel of Montgomery Ward since February 20, 1992, and was Senior Vice President--Apparel of Montgomery Ward from July 3, 1991 to February 19, 1992. Mr. Rusthoven served as Vice President and General Merchandise Manager, Men's Apparel, Footwear and Accessories from June 6, 1990 to July 2, 1991. Prior thereto, he served as President and Chief Operating Officer of Baddour, Inc., parent company of Fred's Dollar Stores in Memphis, Tennessee from March, 1990 to June, 1990. Mr. Rusthoven is also currently on a leave of absence from Montgomery Ward. Mr. Cato served as an Executive Vice President of the Company from May 15, 1992 until his current leave of absence which began on February 4, 1994. Mr. Cato was Executive Vice President--Logistics and Product Service of Montgomery Ward from November 8, 1990 until February 4, 1994 and was Senior Vice President--Logistics from March 3, 1989 until November 7, 1990. Mr. Cato is also on a leave of absence from Montgomery Ward. Ms. Harms has been a Vice President and Treasurer of the Company since January 1, 1989. Ms. Harms has been Vice President and Treasurer of Montgomery Ward since May 1, 1988. Mr. Connolly has been Executive Vice President, Apparel of Montgomery Ward since February 2, 1994. Prior thereto, he was Senior Vice President and General Merchandise Manager, Women's and Intimate Apparel, Accessories, Health and Beauty Aids and Sundries of Wal-Mart Stores, Incorporated from August 1989 to December 1993. He served as Vice President and General Merchandise Manager, Women's Apparel of Montgomery Ward from December 1987 to July 1989. Mr. McCaffrey has been Executive Vice President, Marketing of Montgomery Ward since August 4, 1992. Mr. McCaffrey served as Senior Vice President-Advertising of Montgomery Ward from November 11, 1991 to August 3, 1992, Senior Vice President and General Merchandise Manager, Intimates, Footwear and Accessories of Montgomery Ward from September 19, 1991 to November 10, 1991 and Senior Vice President-Merchandise Planning of Montgomery Ward from July 3, 1991 to September 18, 1991. Prior thereto, he served as Vice President-Merchandise Planning of Montgomery Ward from February 19, 1991 to July 2, 1991, Vice- President-Apparel Planning and Field Merchandising of Montgomery Ward from October 11, 1990 to February 18, 1991, Vice President-Apparel Planning and Product Development of Montgomery Ward from July 28, 1989 to October 10, 1990 and Vice President-Apparel Marketing, Planning and Development of Montgomery Ward from January 4, 1989 to July 27, 1989. Mr. McCaffrey was named Vice Chairman of Signature on April 12, 1994. 48 Mr. Reddington has been Chairman and Chief Executive Officer of Signature since April 25, 1994. Prior thereto, he was President and Chief Executive Officer of Sears Canada, Inc. from 1989 until his retirement in December 1993. Mr. Lieberman has been a director of the Company since June 25, 1988, is a senior partner in the law firm of Altheimer & Gray and has practiced law in Chicago, Illinois since 1954. Mr. Cathcart has been a director of the Company since June 25, 1988. In January, 1990, Mr. Cathcart, who is retired, resigned as Chairman of Kidder, Peabody Group Inc., a position he held since January, 1989. Mr. Cathcart has been a director of Illinois Tool Works, Inc. since 1964 and a director of General Electric Financial Services, Inc. and GE Capital since 1987. He is also a director of Quaker Oats Company, Baxter International and General Electric Company. Mr. Ekedahl has been a director of the Company since June 25, 1988. He became a Vice President of General Electric Company and Senior Vice President and General Manager--Retailer Financial Services of GE Capital in March 1989. Mr. Nayden has been a director of the Company since June 25, 1988. He has been President and Chief Operating Officer of Kidder, Peabody Group, Inc. since June 22, 1994. Prior thereto, Mr. Nayden was an Executive Vice President of GE Capital from February, 1989 to June 1994. Mr. Nayden is a director of General Electric Financial Services, Inc., GE Capital and Penske Truck Leasing. Mr. Parke has been a director of the Company since April 27, 1990. He has been Senior Vice President-- Finance of General Electric Financial Services, Inc. since November, 1989. He was Vice President--Finance and Information Systems, Aircraft Engines of General Electric Company from January, 1989 to November, 1989. Mr. Parke is a director of FGIC Corporation, Polaris Holding Co., Kidder, Peabody Group, Inc., GE Credit International, N.Y., and Financial Guaranty Insurance Co. 49 EXECUTIVE COMPENSATION The Company had no employees and paid no compensation in 1993. The following information details compensation accrued by Montgomery Ward and its subsidiaries to executive officers of the Company. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------------------- ------------------ OTHER SECURITIES ALL OTHER ANNUAL UNDERLYING LTIP COMPEN- NAME AND PRINCIPAL COMPENSATION OPTIONS PAYOUT SATION POSITION YEAR SALARY ($) BONUS ($) ($)/1/ (#) ($) ($)/2/ - ------------------ ---- ---------- --------- ------------ ---------- ------- --------- Bernard F. Brennan 1993 1,052,500 400,000 3,747,054 -- 732,555 2,936 Chairman and Chief Ex- 1992 1,017,500 354,200 1,497,488 -- 587,777 2,884 ecutive Officer 1991 993,333 364,210 -- -- 591,894 2,800 Richard Bergel 1993 404,167 130,000 279,336 -- 200,700 2,936 Vice Chairman 1992 350,000 125,000 136,993 -- 132,510 2,884 1991 283,958 69,000 -- -- 99,801 2,800 Robert R. Schoeberl 1993 312,500 71,557 65,612 50,000 112,153 2,936 Executive Vice Presi- 1992 264,167 49,850 25,309 -- 82,168 2,884 dent 1991 216,667 61,800 -- -- 79,704 2,683 Leslie A. Ball/3/ 1993 450,000 150,000 1,413,040 -- 194,423 -- 1992 112,500 125,000 307,832 100,000 107,565 -- Spencer H. Heine 1993 279,167 75,000 59,196 -- 101,775 2,936 Executive Vice Presi- 1992 223,750 68,304 22,460 -- 72,870 2,694 dent, 1991 181,667 60,000 -- -- 67,687 2,415 Secretary and General Counsel Harold D. Kahn/4/ 1993 598,958 200,000 3,139,277 -- 270,031 -- 1992 208,333 100,000 308,294 300,000 149,396 --
- -------- 1 Includes company paid legal fees, taxes paid on stock transfers and purchases of Company stock at below-market prices. With respect to such legal fees, see "--Certain Transactions" below. Also includes executive perquisites for Mr. Bergel (primarily a living expense allowance of $27,201 and $25,708 and a cash bonus equal to related income taxes of $21,160 and $14,732 for 1993 and 1992, respectively). No other named executive officer received perquisites exceeding $50,000 or 10% of salary and bonus. Information is given for 1993 and 1992 only pursuant to the proxy rule transitional provisions applicable to this column. 2 Represents Company matching contributions to the Savings and Profit Sharing Plan. 3 Mr. Ball joined the Company on September 18, 1992 as Executive Vice President, Apparel of Montgomery Ward and resigned from the Company effective January 31, 1994. 4 Mr. Kahn joined the Company on September 11, 1992 as President and resigned from the Company effective December 15, 1993. Option Grants and Exercises. The following tables set forth summaries of the terms of stock options granted to Mr. Schoeberl during the Company's 1993 fiscal year and the value of unexercised options held by him and Messrs. Ball and Kahn as of January 1, 1994. No other named executive officer received options during the 1993 fiscal year. None of the named executive officers exercised any stock options during the 1993 fiscal year. No stock appreciation rights ("SARs") were granted to or exercised by any of the named executive officers during the 1993 fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM -------------------------------------------------- ----------------- NUMBER OF SECURITIES UNDERLYING PERCENTAGE OF TOTAL EXERCISE OPTIONS OPTIONS GRANTED OR BASE GRANTED TO ASSOCIATES PRICE EXPIRATION NAME (#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($) ---- ---------- ------------------- -------- ---------- ------- --------- Robert R. Schoeberl..... 50,000 2.5% 22.50 9/30/2003 708,750 1,788,750 ====== ==== ===== ========= ======= =========
50 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY-END (#) AT FY-END ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Robert R. Schoeberl......... 0 50,000 0 0 Harold D. Kahn.............. 150,000 150,000 $562,500 $562,500 Leslie A. Ball.............. 50,000 50,000 $187,500 $187,500 ======= ======= ======== ========
Long Term Incentive Plan Awards. Certain Montgomery Ward executives recommended by Montgomery Ward's Chief Executive Officer (the "CEO") formerly participated in the Long Term Incentive Plan. The Long Term Incentive Plan consisted of three-year cycles that were initiated annually. If specific corporate, financial, strategic and operational objectives approved by the CEO were achieved for any designated cycle, cash was awarded under the Long Term Incentive Plan to each participant based upon the average base salary of such participant if, in the judgment of the CEO, such participant contributed substantially and positively to Montgomery Ward's overall corporate performance. Target payouts, which were 50% of average base salary for each of the named executive officers, could be adjusted with the approval of the CEO upward or downward by 40% based upon the results of Montgomery Ward against its objectives for the cycle, and no award would be given for performance below minimum performance levels. Mr. Brennan participated in a long term incentive plan which is the same as the Long Term Incentive Plan, except that his maximum award was 75% of his current base salary. The following table sets forth information regarding the participation of Messrs. Brennan, Bergel, Schoeberl, Ball, Heine, and Kahn and in the three-year award cycle under the Long Term Incentive Plan commencing in the Company's 1993 fiscal year. On May 20, 1994, the shareholders of the Company approved a new plan, the Executive Long-Term Incentive Plan, under which senior executives of Montgomery Ward, including all named executive officers, will receive future benefits, rather than under the Long Term Incentive Plan. LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
PERFORMANCE NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS UNDER SHARES, UNITS PERIOD UNTIL NON-STOCK PRICE-BASED PLANS OR OTHER MATURATION OR --------------------------------------------- NAME RIGHTS (#)/1/ PAYOUT THRESHOLD ($)/2/ TARGET ($)/3/ MAXIMUM ($)/4/ ---- ------------- ------------- ---------------- ------------- -------------- Bernard F. Brennan...... 712,500 1995 427,500 712,500 997,500 Richard Bergel.......... 225,000 1995 135,000 225,000 315,000 Robert R. Schoeberl..... 175,000 1995 105,000 175,000 245,500 Leslie A. Ball/5/....... -- -- -- -- -- Spencer H. Heine........ 200,000 1995 120,000 200,000 280,000 Harold D. Kahn/6/....... -- -- -- -- --
- -------- 1 Units each represent one dollar of target payout, based on a target of 50% of current base salary for Messrs. Bergel, Schoeberl, Ball, Heine and Kahn and 75% of current base salary for Mr. Brennan. 2 Threshold amounts are 60% of target payouts, representing payout for accomplishment of minimum performance levels. 3 Target levels are based on the attainment of performance goals, with no adjustment to the payout made by the CEO. 4 Maximum levels represent 140% of target payouts, comprising the maximum upward adjustment possible under the Long Term Incentive Plan. 5 Mr. Ball resigned as an officer of the Company effective January 31, 1994. He will receive no further payouts under the Long Term Incentive Plan. Had he not resigned, Mr. Ball would have been eligible to receive from a threshold level of $135,000 to a maximum payout of $315,000. 6 Mr. Kahn resigned as an officer of the Company effective December 15, 1993. He will receive no further payouts under the Long Term Incentive Plan. Had he not resigned, Mr. Kahn would have been eligible to receive from a threshold level of $187,500 to a maximum payout of $437,500. 51 Pension Plan. Executive officers of Montgomery Ward, in addition to many other associates, participate in a pension plan (the "Pension Plan"), which provides benefits defined by formulae based primarily on a participant's annual compensation offset by benefits provided by associates' Basic Contribution and Transferred Contribution accounts in the Savings and Profit Sharing Plan ("Savings Plan"). From 1989 through 1993, no more than $200,000, as adjusted annually under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), of any participant's annual compensation was considered for any purpose, including for purposes of the formulae, under the Pension Plan. Beginning in 1994, no more than $150,000, as adjusted annually under Section 401(a)(17) of the Code, of any participant's compensation per year is considered for any purpose, including for purposes of the formulae, under the Pension Plan. The monthly pension benefit to which current associates are entitled under the Pension Plan at normal retirement age (65 years old) is generally based on benefit formulae that are applicable to different years of service. The formula for service after 1988 applies to credited service, as defined in the Pension Plan, earned after 1988 while making contributions to the Savings Plan and is based on "career earnings". A participant's annual benefit under the post-1988 formula is 1.5% of the participant's eligible pay for each year of credited service after 1988. The Pension Plan formulae benefit is determined by adding the benefit under the post-1988 formula to the participant's accrued benefit under the Pension Plan as of December 31, 1988, as determined under the formulae in effect prior to 1988. A participant's benefit determined under the Pension Plan is reduced by an amount equivalent to an annuity which could be purchased with the participant's Basic Contribution and Transferred Contribution accounts in the Savings Plan. The following table sets forth the estimated annual benefits (calculated on a straight life annuity basis) upon retirement at age 65 under the Pension Plan, which is the only defined benefit plan under which associates of Montgomery Ward can currently accrue a benefit, to Mr. Brennan and the other named executive officers of the Company (calculated on the basis of estimated years of service at retirement age; levels of compensation paid in calendar year 1993 (including compensation pursuant to the Performance Management Program), assuming 6% annual increases; and without regard to any reduction for benefits under the Savings Plan):
ESTIMATED ANNUAL NAME OF PARTICIPANT PENSION AT RETIREMENT ------------------- --------------------- Bernard F. Brennan.................................. $107,185 Richard Bergel...................................... 98,173 Robert R. Schoeberl................................. 84,913 Leslie A. Ball...................................... N/A Spencer H. Heine.................................... 98,399 Harold D. Kahn...................................... N/A
Messrs. Ball and Kahn have resigned from the Company and will receive no payments under the Pension Plan. Director Compensation Arrangements. Messrs. Cathcart and Lieberman are paid director fees of $6,000 per fiscal quarter, plus $1,500 for each meeting such director attends of the Board of Directors of the Company and Montgomery Ward, plus $1,500 for each meeting such director attends of a committee of the Company and Montgomery Ward of which such director is a member, provided that if a meeting of the Board of Directors of the Company is held jointly with or immediately prior to or following a meeting of the Board of Directors of Montgomery Ward, the aggregate fees for such meetings shall be $1,500, and provided further if a meeting of a committee of the Company is held jointly with or immediately prior to or following a meeting of a committee of Montgomery Ward, the aggregate fees for such meetings shall be $1,500. Such directors fees may be converted into Series 1 Shares or Series 2 Shares pursuant to the Directors Fee Plan described below. Directors of the Company who are also executive officers of Montgomery Ward currently receive no directors fees or other compensation for their service as directors of the Company. Likewise, directors of the Company who are executive officers of GE Capital currently receive no directors fees or other compensation for their service as directors of the Company. 52 In December, 1990, the Board of Directors adopted a plan, which was approved by the shareholders in May, 1991, allowing Messrs. Cathcart and Lieberman to elect to receive all or any portion of the fees for their services as directors of the Company and Montgomery Ward in Series 1 Shares. In May, 1991, the Board of Directors amended and restated the plan as the Directors Plan (the "Directors Fee Plan") to permit (a) the participation of additional directors, (b) the receipt of Series 2 Shares as well as Series 1 Shares and (c) the establishment of a committee (the "Directors Fee Plan Committee") to (i) administer the plan, (ii) estimate director fees payable to directors for the fiscal year and (iii) permit directors to elect to receive Class A Shares with a value determined by the Directors Fee Plan Committee not to exceed the estimated fees. The Directors Fee Plan as so amended and restated was approved by the shareholders on May 17, 1991. Directors of the Company or Montgomery Ward other than members of the Directors Fee Plan Committee are eligible to participate in the Directors Fee Plan if designated by the Directors Fee Plan Committee. The Directors Fee Plan Committee is comprised of not fewer than two directors who are appointed by the Board of Directors and who serve at the pleasure of the Board of Directors. The current members of the Directors Fee Plan Committee are Messrs. Brennan and Heine. Of the seven eligible directors, the Directors Fee Plan Committee has designated only Messrs. Cathcart and Lieberman as participants in the Directors Fee Plan as of July 2, 1994. As of such date, Messrs. Cathcart and Lieberman have acquired 5,322 and 6,282 Series 1 Shares, respectively, pursuant to rights ("Conversion Rights") under the Directors Fee Plan. The Directors Fee Plan Committee decides based on the past service of the director whether there should be an acceleration of the grant of Conversion Rights based on an estimate of director fees for the fiscal year. If the grant of Conversion Rights is accelerated by the Directors Fee Plan Committee, the Directors Fee Plan Committee determines the number of Class A Shares to which the Conversion Rights relate, the value of the Class A Shares, the duration of the Conversion Rights and the limitations on the Class A Shares acquired pursuant to the Conversion Rights. It is currently anticipated that any Class A Shares acquired pursuant to accelerated Conversion Rights would be forfeited to the extent a director does not earn the anticipated director fees for the fiscal year. Conversion Rights are automatically granted after the end of each fiscal quarter of the Company to participating directors in a number determined by dividing the director fees for the fiscal quarter by the fair market value per share of the Company's Common Stock. The number of Class A Shares acquired pursuant to accelerated Conversion Rights reduces the number of automatically granted Conversion Rights. The acquisition of Class A Shares by directors pursuant to Conversion Rights does not require any direct payment by a director, but the director fees which otherwise would be payable to the director are reduced by the fair market value of the Class A Shares acquired. If directors acquire Class A Shares pursuant to Conversion Rights, the Company will pay the directors an amount sufficient to pay all applicable federal and state taxes payable by the directors with respect to the Class A Shares acquired pursuant to Conversion Rights and the amount attributable to this payment. The Board of Directors may amend or terminate the Directors Fee Plan, except that no such action by the Board of Directors may change the terms and conditions of any Conversion Rights previously granted in a manner adverse to the holder of the Conversion Right without the consent of such holder. Shareholder approval of an amendment to the Directors Fee Plan is necessary if required for compliance with Rule 16b-3 ("Rule 16b-3") promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Act"), and the timing of certain amendments may be limited by Rule 16b-3. The Directors Fee Plan Committee has the right to make adjustments with respect to Conversion Rights if Montgomery Ward or the Company dissolves or is liquidated or upon the occurrence of a public offering of shares of the Company. 53 Employment Contracts and Severance Arrangements Executive Employment Agreements. In the course of recruiting new executives, promoting existing associates to executive positions and increasing the responsibilities of existing executives, Montgomery Ward frequently enters into employment agreements which set forth the general terms of the compensation arrangements for the executive. Such agreements typically set forth, among other things, a recipient's base salary, the target bonus under the Performance Management Program (the "PMP") (which links each executive's award to individual and Company performance against a set of financial and other strategic goals), the maximum percentage of the target bonus under the PMP that can be earned, participation in the Long Term Incentive Plan with initial target bonuses for applicable Plan cycles, the percentage of the executive's base pay that can be earned annually through the Plan after the initial bonus target period has run, bonus guarantees, if any, and the number of stock options, if any, that will initially be granted to the executive in his or her new position. Recent employment agreements provide for compensation arrangements pursuant to the Senior Executive Performance Management Program and the Executive Long-Term Incentive Plan, each of which was approved by the Company's stockholders at the Company's May 20, 1994 annual meeting of stockholders. Of the executive officers named in the Summary Compensation Table, Mr. Bergel has an agreement of this type and Messrs. Kahn and Ball had agreements of this type. Mr. Kahn and Montgomery Ward entered into their agreement in connection with Mr. Kahn's agreement to serve as President of Montgomery Ward; Mr. Bergel and Montgomery Ward entered into their agreement in connection with Mr. Bergel's appointment to the position of Chief Executive Officer of Lechmere; and Mr. Ball and Montgomery Ward entered into their agreement when Mr. Ball was named Executive Vice President, Apparel of Montgomery Ward. The agreement with Mr. Bergel provides, and the agreements with Mr. Kahn and Mr. Ball provided, for, respectively, (i) initial annual base salaries of $600,000, $625,000, and $450,000; (ii) PMP target bonuses of $200,000 (guaranteed at 100% for 1994), $200,000 (guaranteed at 50% for 1992 and 100% for 1993), and $150,000 (guaranteed at 83.33% for 1992 and 100% for 1993), in each case with opportunities to earn up to 150% of such target bonuses; and (iii) Long Term Incentive Plan participation at a target bonus level of base salary for each executive of 50%. The agreements with Mr. Kahn and Mr. Ball stated that the executive would receive options to purchase 300,000 and 100,000 Class A Shares, respectively, with 25% of such options vesting immediately and 25% vesting each year thereafter (which options were granted). The agreement with Mr. Bergel stated that he would receive options to purchase 200,000 Class A Shares at $22.50 per share, with such options vesting 100% on April 4, 1996. Mr. Bergel was granted such option in July 1994. Each of the agreements also contained certain severance arrangements. The severance arrangements with Mr. Bergel are more fully described below. Each of Messrs. Kahn and Ball entered into a General Release and Covenant Not to Sue (a "Release") with Montgomery Ward upon the termination of the employment of such executive with Montgomery Ward. The provisions of each Release expressly supersede the severance provisions in the applicable agreement and are more fully described below. Mr. Bergel's agreement also provides that, upon the occurrence of certain events, including his separation from Lechmere before April 1, 1996, Mr. Bergel may elect to retire upon thirty days notice. The agreement provides that upon Mr. Bergel's retirement, he will be permitted to sell 25% of the Class A Shares held by him to the Company for cash in each of the year of such retirement and the next succeeding three (3) years. Also upon Mr. Bergel's retirement, the Company will provide him with a 100% relocation package to move to any location of his choice in the continental United States. The Releases with Mr. Kahn and Mr. Ball provide for cash payments of a total of $2,373,157 and $810,000, respectively, subsidization of each executive's continuation of coverage in Montgomery Ward's health care plan through December 31, 1995 and January 31, 1995, respectively, and certain modifications of the non-compete clauses in each executive's agreement. In addition, the Company promised in each Release to pay the executive the "spread" between the exercise price of all options held by the executive and $26.50 per share, the fair market value of the Common Stock for the Company's 1994 fiscal year, as determined pursuant to the Stockholders' Agreement. The Company also agreed to purchase all vested stock held by each executive at $26.50 per share. In connection with the foregoing, the executive in each Release discharged Montgomery Ward and its officers, directors, agents, employees and affiliates from all claims arising out of the executive's employment with Montgomery Ward. Each Release also contains provisions relating to confidentiality of information received in connection with the executive's employment. 54 Senior Officer Severance Plan. The normal Severance Plan for certain senior officers of Montgomery Ward provides that upon termination of a participating officer's employment with Montgomery Ward, for reasons other than cause, death, retirement or resignation, the senior officer will receive from Montgomery Ward a payment equal to 12 months of his or her base pay. This payment is to be in lieu of any other severance pay benefits available to the senior officer under any other Montgomery Ward policy. The participants in this plan currently consist of 22 senior officers of the Company. Compensation Committee Interlocks and Insider Participation. Mr. Brennan, Chief Executive Officer of the Company and of Montgomery Ward, serves as a member of the Compensation Committee of Montgomery Ward's Board of Directors. Robert A. Kasenter, Executive Vice President of the Company and Executive Vice President, Human Resources of Montgomery Ward, serves as Secretary of the Compensation Committee of Montgomery Ward's Board of Directors, although Mr. Kasenter is not a director of the Company or of Montgomery Ward. CERTAIN TRANSACTIONS Under the terms of a line of credit agreement ("Line of Credit Agreement") between Brennan and GE Capital, Brennan, at his option, had the right to borrow up to $5 million to be secured by a pledge of Class A Shares owned by him. On August 10, 1993, Mr. Brennan paid to GE Capital $2,495,657, in full payment of all borrowings under the Line of Credit Agreement, the loan facility was cancelled and all pledged shares were released. In 1991, Montgomery Ward arranged lines of credit with the Northern Trust Company and the First National Bank of Chicago (the "Banks") totaling an aggregate of not more than $10,000,000 which is currently available to twenty- four (24) associates, including directors who are associates of the Company and executive officers of the Company (the "Line of Credit Program"). A committee of the Board of Directors of the Company (consisting of Messrs. Brennan and Lieberman) determines which associates are eligible to borrow money under the Line of Credit Program and the maximum amounts which each, respectively, can borrow. Any director or executive officer desiring to borrow money from a Bank under the Line of Credit Program is required to pledge to such Bank as collateral a number of Class A Shares of vested stock of the Company held by the individual, the fair market value of which is equal to twice the amount the individual desires to borrow. All loans are payable in five years with annual interest payments. Any loan may be prepaid without penalty. Interest accrues at the applicable Bank's prime rate. The Company has agreed with the Banks that, in the event any individual should default upon his or her repayment obligations, the Company will purchase the note from the Bank or purchase the pledged stock from the Bank at the fair market value with the entire amount defaulted upon to be paid by the Company if, and to the extent, the defaulted amount exceeds the amount of the payment for the Class A Shares. As of January 1, 1994, two (2) loans in excess of $60,000 are outstanding to executive officers of the Company under the Line of Credit Program: one to Mr. Schoeberl for $150,000 and one to Mr. Kasenter for $130,730. No other loans under the Line of Credit Program have been made to directors and executive officers of the Company in an amount in excess of $60,000. In 1992, the Company agreed to pay the reasonable legal fees and expenses of Altheimer & Gray and Arnold & Porter in connection with their rendition of services to stockholders of the Company who acquired Series 1 Shares in 1988 (the "Original Stockholders") in a controversy with the Internal Revenue Service with respect to such acquisition. Such payment constitutes compensation to all or a portion of the Original Stockholders, and has been and will be prorated among such Original Stockholders based upon their relative shareholdings. During 1993, the total amount of such compensation, including tax gross-ups, to directors and executive officers which exceed $60,000 were as follows: Mr. Brennan, $3,747,054; Mr. Andrews, $299,546; Mr. Bergel, $224,691; Mr. Pohlmann, $224,691; Mr. Schoeberl, $63,353; and Mr. Cato, $60,049. On March 14, 1994, as one component of a settlement with the IRS, the IRS and each of the Original Stockholders entered into a Stipulation of Settlement, pursuant to which the IRS conceded that no tax 55 deficiencies were due from the Original Stockholders. Accordingly, fees and expenses relating to this matter and paid by the Company after March 1994 should be minimal. As another component of the settlement, the Company agreed to pay the IRS the sum of $6,000,000. As discussed elsewhere herein (see "BUSINESS--Account Purchase Agreement"), Montgomery Ward extends credit to its customers under an open-end, revolving credit plan and in connection therewith, Montgomery Ward and Montgomery Ward Credit have entered into the Account Purchase Agreement pursuant to which Montgomery Ward Credit purchases receivables from time to time and provides services to Montgomery Ward. Under the terms of a letter agreement dated June 24, 1988 among Signature, Montgomery Ward Credit and Montgomery Ward, Montgomery Ward Credit is purchasing the customer accounts receivable of Signature on terms similar to those contained in the Account Purchase Agreement. Set forth below is a description of various transactions entered into in connection with the Account Purchase Agreement and in connection with the letter agreement. Unless otherwise specified, information given is for aggregate transactions under both the Account Purchase Agreement and the letter agreement. As of January 1, 1994, there were $4.9 billion of Montgomery Ward private label credit card receivables owned by Montgomery Ward Credit. During each of the 1993, 1992 and 1991 fiscal years, Montgomery Ward Credit purchased approximately $3.7 billion, $3.5 billion and $3.5 billion, respectively, of such receivables from Montgomery Ward. As of July 2, 1994, Montgomery Ward Credit has purchased approximately $1,751 million of such receivables from Montgomery Ward during the current fiscal year. The Company anticipates significant additional purchases under the Account Purchase Agreement during the remainder of fiscal 1994. During the 1993, 1992 and 1991 fiscal years, Montgomery Ward paid approximately $0, $30,000,000 and $18,700,000, respectively, to Montgomery Ward Credit in payment of loss sharing under the Account Purchase Agreement. In the first quarter of 1994, an additional $35,000,000 was paid for 1993 losses incurred under the Account Purchase Agreement. Presently, Montgomery Ward is maker on three notes outstanding payable to Montgomery Ward Credit, one representing credit losses in fiscal 1991 for $18,000,000, one representing credit losses in fiscal 1992 for $63,620,000 and one representing credit losses in fiscal 1993 for $25,507,000. During 1992, Montgomery Ward finance charge rates were increased in certain states effective July 1 and October 1 and Montgomery Ward is entitled to share in such increased finance charges. Under the Account Purchase Agreement, Montgomery Ward's share of such increases is available for offset against the notes described above made by Montgomery Ward payable to Montgomery Ward Credit. Such amount is evidenced by a note which bears interest at the same rate and is due at the same time as the notes payable to Montgomery Ward Credit. The finance charge offset applicable to those notes is $9,600,000. Under the letter agreement, Montgomery Ward Credit also provides administrative services in connection with Signature products. Fees paid by Signature to Montgomery Ward Credit for such services in each of the Company's 1993, 1992 and 1991 fiscal years totaled approximately $5,000,000. Montgomery Ward has entered into a Program Agreement dated October 12, 1989 with GE Capital by which GE Capital pays certain manufacturers and distributors the invoice price of products acquired by Montgomery Ward, and whereby Montgomery Ward reimburses GE Capital for such payments according to an agreed upon schedule. The aggregate amount of outstanding payments and other amounts payable under the Program Agreement is not to exceed $175 million at any one time. During the Company's 1993 fiscal year, Montgomery Ward reimbursed approximately $434 million to GE Capital under the Program Agreement, and as of April 2, 1994, Montgomery Ward has reimbursed approximately $137 million under the Program Agreement during the current fiscal year. The Company anticipates continuing reimbursement obligations pursuant to the Program Agreement. In September, 1992, Montgomery Ward repaid approximately $128 million of borrowings under the Subordinated Loan Agreement dated as of June 23, 1988 between Montgomery Ward and GE Capital, as amended. The highest amounts of principal due under the Subordinated Loan Agreement during the Company's 1992 and 1991 fiscal years were approximately $158 million and $170 million, respectively. The Company paid GE Capital $8 million in interest payments under the Subordinated Loan Agreement during 1992. During the Company's 1991 fiscal year, Montgomery Ward paid approximately $17 million in interest, and approximately $12 million in principal under the Subordinated Loan Agreement. 56 On September 30, 1992, Montgomery Ward declared a $93 million dividend payable to the Company, which the Company used to redeem its junior preferred stock and senior preferred stock held by GE Capital, and to pay the accrued dividends thereon. Total dividends paid by the Company to GE Capital on the preferred stock during 1992 were approximately $7,912,000. Total dividends paid to GE Capital on the preferred stock during the 1991 fiscal year were approximately $13 million. The 500 shares of senior preferred stock and the 400 shares of junior preferred stock were each redeemed for their liquidation value of $100,000 per share. On April 27, 1994, GE Capital purchased 750 shares of Senior Preferred Stock from the Company for approximately $75 million. See "DESCRIPTION OF EQUITY SECURITIES--Senior Preferred Stock." General Electric Company, the parent of GE Capital, is, in the ordinary course of its business, a major supplier of consumer goods to Montgomery Ward for sale at Montgomery Ward stores and Lechmere stores in the ordinary course of their businesses. SELLING SHAREHOLDERS Names of shareholders and the number of Shares being offered by such shareholders will be identified from time to time by post-effective amendment in accordance with applicable federal and state laws. PRINCIPAL SHAREHOLDERS CLASS A SHARES The following table sets forth the beneficial ownership, as of July 2, 1994, of Class A Shares (i) by each person who is a director of the Company (none of whom except the individuals identified owns any shares of the Company's equity securities), (ii) by each executive officer whose compensation is reflected in the Summary Compensation Table (none of whom except the individuals identified owns any shares of the Company's equity securities), (iii) by each person who is known to be a holder of more than 5% of Class A Shares and (iv) by all directors and executive officers of the Company as a group.
INDIVIDUAL OR GROUP SHARES % - ------------------- ---------- ----- Bernard F. Brennan (a)........................................ 17,276,306 88.7% Myron Lieberman (b)........................................... 2,510,873 12.9% Richard Bergel (c)(d)......................................... 852,500 4.4% Spencer H. Heine (c).......................................... 251,250 1.3% Bernard W. Andrews (c)(e)..................................... 350,000 1.8% Silas S. Cathcart (c)(f)...................................... 15,605 0.0% Robert R. Schoeberl (c)(g).................................... 228,333 1.2% Tamara Brennan (h)............................................ 2,200,000 11.3% All directors and executive officers as a group (19 persons) (i).......................................................... 18,887,136 94.2%
- -------- (a) Comprised of 13,025,750 Class A Shares (66.9% of the Class A Shares and 29.3% of the Common Stock outstanding as of July 2, 1994) owned of record by Mr. Brennan and with respect to which Mr. Brennan has sole investment and voting power, and 4,250,556 Class A Shares (21.8% of the Class A shares and 9.6% of the Common Stock outstanding as of July 2, 1994) owned of record by Mr. Brennan as voting trustee of the Voting Trust and with respect to which Mr. Brennan has sole voting power as voting trustee but no investment power. Does not include 2,200,000 Class A Shares (11.3% of the Class A Shares and 4.9% of the Common Stock outstanding as of July 2, 1994) which are owned by Myron Lieberman, as trustee of a trust (the "Family Trust") for the benefit of members of Mr. Brennan's family with respect to which Mr. Brennan has no voting or investment power, but with respect to which Tamara Brennan, Mr. Brennan's wife, may acquire shared voting and dispositive power. See Note (h) below. Mr. Brennan disclaims beneficial ownership of such 2,200,000 Class A Shares. Does not include Class A Shares which may be acquired by the holders of Options exercisable as of July 2, 1994 or which became exercisable within 60 days of the date hereof, which Class A Shares will be required to be deposited by the holders thereof in the Voting Trust upon exercise of such Options. Mr. Brennan's business address is Montgomery Ward Plaza, Chicago, Illinois 60671. 57 (b) Includes 294,250 Class A Shares represented by Voting Trust Certificates owned by Lieberman Investment Limited Partnership, a limited partnership of which Mr. Lieberman is the sole general partner. Also includes 2,200,000 Class A Shares with respect to which Mr. Lieberman has sole voting and investment power as trustee of the Family Trust. Such 2,200,000 Class A Shares are not deposited in the voting trust under which Mr. Brennan serves as voting trustee. See Note (c) below. All shares other than the 2,200,000 Class A Shares as to which Mr. Lieberman has beneficial ownership are represented by Voting Trust Certificates and such shares are held in a voting trust as to which Mr. Brennan, as voting trustee, has sole voting power. Includes 341 Class A Shares which Mr. Lieberman acquired on July 8, 1994 pursuant to Conversion Rights which arose on July 1, 1994 and which, pursuant to a prior election by Mr. Lieberman, were automatically exercised on July 8, 1994. Mr. Lieberman's business address is 10 South Wacker Drive, Chicago, Illinois 60606. (c) Represents ownership of Voting Trust Certificates with respect to Class A Shares held in the Voting Trust or ownership of Options exercisable on the date hereof or within sixty days of the date hereof with respect to Class A Shares which will be required to be deposited in the Voting Trust upon exercise of such Options, as to which Mr. Brennan, as voting trustee, has or will have sole voting power and the persons indicated have or will have sole investment power. (d) Includes 60,000 Class A Shares with respect to which Mr. Bergel has sole investment power as trustee of trusts for the benefit of members of the family of Robert A. Kasenter, an officer of the Company. Does not include 90,000 Class A Shares with respect to which Mr. Kasenter, as trustee of a trust for the benefit of members of Mr. Bergel's family, has sole investment power, but with respect to which Mr. Bergel has no voting or investment power. (e) Includes 350,000 Class A Shares which may be acquired by Mr. Andrews pursuant to options exercisable on July 2, 1994. (f) Includes 283 Class A Shares which Mr. Cathcart acquired on July 8, 1994 pursuant to Conversion Rights which arose on July 1, 1994 and which, pursuant to a prior election by Mr. Cathcart, were automatically exercised on July 8, 1994. (g) Does not include 26,667 Class A Shares with respect to which a trustee of a trust for the benefit of members of Mr. Schoeberl's family has sole investment power, but with respect to which Mr. Schoeberl has no voting or investment power. (h) Represents Class A Shares with respect to which Mrs. Brennan, if she were to elect to become an advisor to the trustee of the Family Trust, may acquire shared power to vote or direct the vote of, and shared power to dispose or direct the disposition of, such shares. See Notes (a) and (b) above. (i) Represents all Class A Shares with respect to which executive officers and directors have investment power, which is in each case sole investment power. Does not include 1,162,694 Class A Shares with respect to which Mr. Brennan has sole voting power as voting trustee, but with respect to which neither he nor any other officer or director of the Company has investment power. Includes 553,050 Class A Shares which may be acquired by executive officers or directors at purchase prices ranging from $0.20 to $22.50 per share pursuant to Options exercisable on July 2, 1994. Includes 624 Class A Shares which were acquired by directors on July 8, 1994 pursuant to Conversion Rights which arose on July 1, 1994 and which, pursuant to prior elections by such directors, were automatically exercised on July 8, 1994. Includes 19,850 Class A Shares which can be acquired pursuant to Options which became exercisable on July 10, 1994 or become exercisable on August 13, 1994, August 15, 1994 and August 16, 1994 (all dates within 60 days of the date hereof). CLASS B SHARES; SENIOR PREFERRED STOCK GE Capital owns 100% of the 25,000,000 Class B Shares currently outstanding. Such shares represent 56.2% of the outstanding Common Stock. GE Capital also owns 100% of the 750 shares of Senior Preferred Stock of the Company having a liquidation value of $100,000 per share outstanding as of the date of this Proxy Statement. Such shares represent 100% of the Company's outstanding Preferred Stock. GE Capital's address is 260 Long Ridge Road, Stamford, Connecticut 06902. 58 DESCRIPTION OF EQUITY SECURITIES The total authorized capital stock of the Company is comprised of 55,812,750 shares, consisting of: 55,812,000 shares of Common Stock, par value $.01 per share; 30,812,000 shares of which are designated as Class A Common Stock which consist of 25,000,000 shares of Class A Common Stock, Series 1, 5,412,000 shares of Class A Common Stock, Series 2, and 400,000 shares of Class A Common Stock, Series 3; 25,000,000 shares of Class B Common Stock; and 750 shares of Senior Preferred Stock. The following is a summary of certain provisions of the Certificate of Incorporation and the By-Laws of the Company. The Summary is qualified in its entirety by reference to the Certificate of Incorporation and the By-Laws which are Exhibits to the Registration Statement. COMMON STOCK Voting Rights. Each share of Class B Common Stock entitles the holder thereof to one vote. Each share of Class A Common Stock entitles the holder thereof to one vote per share so long as the Outstanding Amount is less than or equal to 25,000,000 (The "Series 1 Amount"). So long as the Outstanding Amount is greater than the Series 1 Amount, each share of Class A Common Stock, irrespective of series, will entitle the holder thereof to a fraction of a vote per share equal to one (1) multiplied by a fraction the numerator of which is the Series 1 Amount and the denominator of which is the Outstanding Amount. Under the following circumstances, class voting will be permitted as follows: (a) At such time, if any, as GE Capital and its affiliates cease to own, in the aggregate, 50% of the amount of shares of Common Stock initially purchased by them, the number of directors which the Designator shall have the right to designate shall be increased by one and the number of directors GE Capital shall have the right to designate shall be reduced by one. If GE Capital or its affiliates cease to own, in the aggregate, 20% of such shares, the number of directors will be automatically changed to seven and the holders of the Class A Common Stock, voting as a class, will be entitled to elect five of such directors, and the holders of the Class B Common Stock, voting as a class, will be entitled to elect two of such directors; provided, however, that as long as the Account Purchase Agreement is in effect and GE Capital or any of its affiliates owns any shares of Class B Common Stock, GE Capital will have the right to elect one of the two directors which the holders of the Class B Common Stock will be entitled to elect and all other holders of Class B Common Stock in the aggregate will be entitled to elect the other of the two directors which the holders of Class B Common Stock will be entitled to elect. A vacancy in the directorships to be elected, respectively, by the holders of the Class A Common Stock or the Class B Common Stock may be filled only by the vote or written consent of the holders of Class A Common Stock or Class B Common Stock, as the case may be. (b) Any amendment of the Certificate of Incorporation increasing the number of authorized shares of Class A Common Stock of any series, or Class B Common Stock, may only be adopted with the affirmative vote of the holders of a majority of both the shares of Class A Common Stock, Series 1, then outstanding, and the shares of Class B Common Stock then outstanding, each voting as a class. Purchasers hereunder will be purchasing the beneficial interest in Shares which are held of record by the Voting Trustee as trustee for the Voting Trust. Accordingly, such Purchasers will have investment power but no voting power with respect to the Shares purchased hereunder. Dividends. As and when declared by the Board of Directors of the Company, after payment in full of dividends with respect to Senior Preferred Stock then outstanding, including any arrearages thereon, the aggregate amount of dividends other than stock dividends which is payable to holders of shares of Common Stock, without distinction as to class or series, shall be allocated among the classes and series of Common Stock, as follows: (i) The term "Class A Amount", as used below with respect to a determination of dividends, shall mean the number equal to the lesser of the Series 1 Amount or the Outstanding Amount as of the date of determination; 59 (ii) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount does not exceed the Series 1 Amount, shall be the amount which bears the same ratio to the total amount of such dividends as the Class A Amount bears to the sum of (A) the Class A Amount, plus (B) the number of shares of Class B Common Stock outstanding as of the date of the determination; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; (iii) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount exceeds the Series 1 Amount, (but the Outstanding Amount less the number of shares of Class A Common Stock, Series 3, outstanding (such difference being the "Non-Series 3 Outstanding Amount") does not exceed the Series 1 Amount), shall be the product of the amount which would be payable to holders of Class A Common Stock if the immediately preceding paragraph (ii) were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by a fraction, the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus fifty percent (50%) of the excess of the Outstanding Amount over the Series 1 Amount; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; and (iv) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount exceeds the Series 1 Amount (and paragraph (iii) immediately preceding is not applicable), shall be the product of (x) the amount which would be payable to holders of Class A Common Stock if paragraph (ii) above were applicable and the Class A Amount were equal to the Series 1 Amount, multiplied by (y) a fraction, the numerator of which is the Non-Series 3 Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus eighty-one point five percent (81.5%) of the excess of the Non-Series 3 Outstanding Amount over the Series 1 Amount, and multiplied by (z) a fraction, the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Non-Series 3 Outstanding Amount plus fifty percent (50%) of the number of shares of Class A Common Stock, Series 3, outstanding at such time; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; and (v) The portion of such dividends which is payable to the holders of Class B Common Stock, as a class, shall be the portion of the total amount of such dividends which is not payable to the holders of Class A Common Stock in accordance with paragraph (ii), (iii) or (iv) above, as applicable; and such portion of such dividends which is payable to the holders of the Class B Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class B Common Stock. Liquidation Rights. Upon a liquidation, dissolution or winding up of the Company, holders of Common Stock will be entitled to receive, after prior rights of creditors and holders of Senior Preferred Stock then outstanding, any assets remaining available for distribution to stockholders in the same proportions as they are entitled to receive dividends. Transfer Restrictions. In general, as described elsewhere herein, Purchasers are limited in their rights to sell, assign, pledge, encumber or otherwise transfer shares of Common Stock, and such transfer is subject to rights of first refusal for an indefinite period of time. See "THE STOCKHOLDERS' AGREEMENT." Other. Holders of the Common Stock have no preemptive rights. All outstanding shares of the Common Stock are fully paid and nonassessable. There are no redemption, conversion or sinking fund provisions with respect to the Common Stock. 60 SENIOR PREFERRED STOCK Voting Rights. Except as required by law, the holders of Senior Preferred Stock shall not have any voting rights, except the right to elect one director to be an additional member of the Board of Directors (a) during the period following a default in the payment of accrued dividends on the Senior Preferred Stock for four consecutive quarters until such accrued dividends shall have been paid in full and (b) during the period following any failure to make a mandatory redemption of Senior Preferred Stock until such failure shall have been cured. Dividends. The Certificate of Incorporation provides that the holders of such shares of Senior Preferred Stock are entitled to receive, before any dividends may be declared or paid upon or set aside for the Common Stock, cumulative cash dividends of $4,850 per share per annum, in equal quarterly payments on the last business day of March, June, September and December. Dividend payments made with respect to the Senior Preferred Stock may be made only in cash. No dividends may be declared on shares of Senior Preferred Stock when such declaration or payment would constitute a default under any agreements governing indebtedness of the Company or any other member of the Ward Group. Mandatory Redemption.The holders of a majority of the outstanding Senior Preferred Stock may, by notice served on the Company, not prior to April 28, 1999, require the Company to redeem all or any portion of the outstanding shares of Senior Preferred Stock at a redemption price of $100,000 per share plus unpaid accrued dividends thereon. No redemption of such Preferred Stock could be made when such redemption would constitute a default under any agreements governing indebtedness for borrowed money of the Company or any other member of the Ward Group. Optional Redemption. The Certificate of Incorporation provides that the Company has the right upon ten days' notice to redeem the whole or any part of the Senior Preferred Stock. Any such optional redemption would be at a price of $100,000 per share of the Senior Preferred Stock being redeemed plus unpaid accrued dividends thereon. Liquidation Rights. Upon any liquidation, dissolution or winding up of the Company, the holders of Senior Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any distribution or payment is made to any holder of Common Stock, an amount in cash equal to $100,000 per share plus an amount equal to the unpaid accrued dividends thereon. BY-LAWS; CERTAIN MATTERS REQUIRING THE VOTE OF TWO-THIRDS OF THE DIRECTORS The By-Laws provide that the affirmative vote of not less than two-thirds of the members of the Board of Directors of the Company shall be required in order for the Company to take, or permit, any member of the Ward Group to take any of the following actions: (a) a merger, consolidation or other business combination (other than among members of the Ward Group and other than as part of an acquisition of assets permitted pursuant to the provision described below in clause (m)); (b) any of the following sales (other than intercompany sales within the Ward Group, sales solely of inventory in the ordinary course of business, and sale and leaseback transactions in the ordinary course of business or, to the extent out of the ordinary course of business, consistent with the past practices of the Ward Group): (i) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the Company) where the gross proceeds of sale (exclusive of assumption of liabilities) are in an amount equal to the greater of (A) $50 million or (B) 20% of the consolidated common stockholders' equity of the Company as of the time of the sale; or (ii) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the Company) to the extent the gross proceeds of sale (exclusive of assumption of liabilities), when added to the gross proceeds of all 61 other sales of assets of the Ward Group (exclusive of assumption of liabilities) occurring during that fiscal year, exceed an amount equal to the greater of (A) $100 million or (B) 30% of the consolidated common stockholders' equity of the Company as of the time of the sale; provided, however, that notwithstanding the foregoing limitation, any single sale of assets for gross proceeds not exceeding $1 million (exclusive of assumption of liabilities) shall be excluded from the foregoing computation; (c) amendments to the Certificate of Incorporation or By-Laws of the Company (other than amendments changing the number of authorized shares of Class A Common Stock, Series 2); (d) payment of dividends on shares of Common Stock (other than intercompany dividends among members of the Ward Group); (e) redemptions of shares of Common Stock, other than pursuant to the provisions of the Stockholders' Agreement or the Stock Ownership Plan; (f) public or private offerings of debt or equity securities of any member of the Ward Group, other than to other members of the Ward Group, pursuant to the Stock Ownership Plan or certain provisions of the Stockholders' Agreement permitting the Company to sell shares of Common Stock which it has purchased from Shareholders and permitting demand registrations; (g) guaranties of any indebtedness in excess of $5 million for borrowed money of any person or entity other than a member of the Ward Group; (h) setting of annual financial goals and targets; (i) the making of, or the entry into a binding commitment to make, any capital expenditures which would cause the amount expended (or committed to be expended) by the Ward Group for capital expenditures during a fiscal year to exceed the capital expenditure budget to be contained in the annual financial goals and targets of the Ward Group for such year by more than 10% of the budgeted amount; (j) borrowings by any member of the Ward Group which would cause the aggregate consolidated indebtedness of the Company for money borrowed to exceed $25 million, plus five percent of the consolidated common stockholders' equity of the Company measured at the time of such borrowings, but, in determining the amount of such borrowings and the necessity of approval of 2/3 of the members of the Board of Directors, the following borrowings shall be excluded: (i) borrowings made in connection with the Company's acquisition of Montgomery Ward in June 1988 and borrowings made under any whole or partial refunding or replacement thereof without increasing the principal amounts thereof other than for increases for closing costs (including prepayment penalties) incurred in connection with such refunding or replacement; (ii) purchase money financing incurred in accordance with the annual financial goals and targets of the Ward Group, and purchase money financing in connection with the issuance of notes in payment of the purchase price for shares of Common Stock purchased by the Company pursuant to the Stockholders' Agreement or the Terms and Conditions; it being understood that purchase money financing shall include financing, refinancing or funding of the acquisition price of real property (or any interest therein) or other fixed assets acquired hereafter by a member of the Ward Group, regardless of whether said financing, refinancing or funding is done at the time of, or subsequent to, the acquisition of any such real property (or interest therein) or other fixed assets; (iii) borrowings made for the purpose of redeeming any of the Senior Preferred Stock; or (iv) borrowings made upon the exercise by GE Capital of its right in certain instances to lend the Company, or to permit the Company to borrow, funds sufficient to permit the exercise by the Company of certain options to purchase Shares from Brennan and his Permitted Transferees; (k) increases in compensation and/or fringe, welfare or pension benefits for any member of the executive committee of Montgomery Ward, other than in accordance with the practices and guidelines of the Ward Group in effect from time to time, but in no event beyond the increases being given for comparable executives in comparable retail businesses, as determined from published survey data and guidelines; (l) adoption of a plan of liquidation of the Company; 62 (m) acquisition of assets (other than purchases of inventory and capital expenditures) which would cause the amount expended (or committed to be expended) by the Ward Group for the acquisition of such assets during a fiscal year to exceed the budget for acquisitions of such assets to be contained in the annual financial goals and targets of the Ward Group for such year by more than 10% of the budgeted amount; (n) entry into any transaction (exclusive of compensation and fringe, welfare and pension benefit arrangements with affiliates who are officers, directors or associates of the Ward Group for services rendered by them to the Ward Group) with an affiliate, as that term is defined in the Act, other than affiliates constituting members of the Ward Group; (o) seeking of a consent or waiver from a lender to a member of the Ward Group whose loan to the member of the Ward Group has a then outstanding principal balance in excess of $30 million, in any case in which consent or waiver is required for the entry into a transaction by the Ward Group and which, in the absence of such consent or waiver, would constitute a default or an event of default under the documents evidencing or pertaining to the loan made by the lender, other than any consent or waiver required in connection with (i) the making of any borrowing permitted pursuant to clause (ii), (iii) or (iv) of clause (j) above; (ii) any mandatory prepayment obligation arising from the sale or financing of any real property (or interests therein) or other fixed assets; (iii) any prepayment occurring by reason of a "Change of Control" (as defined in one or more of the loan documents evidencing the borrowings referred to in sub-paragraph (j)(i)) or (iv) the incurring of any liens (other than for money borrowed); (p) authorizing certain transfers of shares of Common Stock in a case where the transferee is not a Management Shareholder, a Permitted Transferee, or a present or prospective associate of the Ward Group; (q) a waiver of certain prohibitions on transfers of shares of Common Stock, as applied to Brennan; (r) a waiver of certain prohibitions on transfers of shares of Common Stock by GE Capital and its affiliates; (s) the determination of certain limitations set forth in the Stockholders' Agreement with respect to the amounts which may be expended by the Company in any fiscal year to purchases of shares of Common Stock; (t) without limiting the generality of any of the foregoing supermajority requirements, any of the following actions with respect to the Account Purchase Agreement: (i) termination thereof by agreement of the parties thereto; (ii) the exercise of a unilateral right of termination and the exercise of all other rights, options and elections granted thereunder to Montgomery Ward; (iii) the giving of waivers and consents with respect thereto; and/or (iv) any amendment thereto; and (u) the termination for Cause of Brennan's employment with any member of the Ward Group. From and after the date of any reduction in the number of members of the Board of Directors that GE Capital has the right to designate pursuant to the By-Laws of the Company, the provisions of the By-Laws of the Company described above requiring a vote of not less than two-thirds of the Board of Directors, may be amended or terminated in whole or in part, upon the affirmative vote of both (x) a majority of the members of the Board of Directors and (y) the holders of a majority of the outstanding shares of Class A Common Stock. The Stockholders' Agreement requires that these requirements be provided in the By- Laws until June 17, 1998. DETERMINATION OF OFFERING PRICE Generally, the purchase price of Shares purchased hereunder by Purchasers designated as Designated Management Optionees will be the Fair Market Value (determined in accordance with the Stockholders' Agreement) for Vested Shares and the lesser of the Fair Market Value and the acquisition price for Non- Vested Shares. Shares to be sold by the Company hereunder will be sold at the price set by the Board of Directors, which it is anticipated will generally be the then Fair Market Value of such Shares. Brennan may sell Shares hereunder at such prices as he determines to be advisable in connection therewith. As of the date hereof, Brennan has not elected to sell any Shares, and thus has not made any such determination. 63 PLAN OF DISTRIBUTION Shares will be sold by Management Shareholders or participants in the Stock Ownership Plan as and when required pursuant to the Stockholders' Agreement or the Terms and Conditions, as the case may be, to Designated Management Optionees. It also is anticipated that the Company may arrange for consensual transactions upon terms similar to those set forth in the option provisions of the Stockholders' Agreement in connection with the renegotiation of its relationships with Management Shareholders, including associates of the Company. Any Shares repurchased by the Company or a member of the Committee, as a Designated Management Optionee, as permitted by the Stockholders' Agreement may be resold by the Company or such member of the Committee. It is currently anticipated that the Non-Vested Shares to be sold by the Selling Shareholders will be purchased by Designated Management Optionees and that the Vested Shares held by these persons will be purchased by the Company. LIMITED TRANSFERABILITY OF SHARES As of July 2, 1994, the Company had 44,476,306 shares of Common Stock outstanding, comprised of 19,326,202 shares of Class A Common Stock, Series 1, 150,104 Shares of Class A Common Stock, Series 2, and 25,000,000 shares of Class B Common Stock owned by GE Capital. All of such shares are subject to restrictions on transfer pursuant to the Stockholders' Agreement or the Terms and Conditions. This adversely affects the ability of the Purchasers hereunder or any subsequent transferees to dispose of their Shares. Consequently, the Purchasers and any such subsequent transferees from them may not be able to liquidate their investments in the event of an emergency or for any other reason. The purchase of Shares is suitable only for persons who have no need for liquidity with respect to their investment. LEGAL OPINIONS The validity of the Class A Common Stock, Series 1, and the Voting Trust Certificates offered hereby is being passed upon for the Company by Altheimer & Gray, Chicago, Illinois. In addition, that firm's legal opinion filed as an exhibit to the Registration Statement of which this Prospectus is a part includes a legal opinion regarding "CERTAIN FEDERAL INCOME TAX ASPECTS." A limited partnership consisting of certain members of such firm owns 294,250 shares of Class A Common Stock, Series 1. Myron Lieberman, a director of the Company and a senior partner in Altheimer & Gray, is the sole general partner of the limited partnership which purchased such shares. Mr. Lieberman also holds 16,623 Shares in his own name. Additionally, Mr. Lieberman is the beneficial owner of 2,200,000 Shares as trustee of the Family Trust. EXPERTS The financial statements and schedules included in or incorporated by reference in this Prospectus and elsewhere in this Registration Statement to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen & Co., independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Reference is made to said report, which includes an explanatory paragraph with respect to the change in the methods of accounting for postretirement benefits other than pensions and income taxes in 1992, as discussed in Notes 6 and 9 to the Consolidated Financial Statements. 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- MONTGOMERY WARD HOLDING CORP. Report of Independent Public Accountants................................. F-2 Consolidated Balance Sheet at January 1, 1994 and January 2, 1993........ F-4 For the 52-Week Period ended January 1, 1994, the 53-Week Period ended January 2, 1993, and the 52-week period ended December 28, 1991 Consolidated Statement of Income....................................... F-3 Consolidated Statement of Shareholders' Equity......................... F-5 Consolidated Statement of Cash Flows................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Consolidated Condensed Balance Sheet at April 2, 1994 (unaudited) and January 1, 1994......................................................... F-34 For the 13-Week Periods Ended April 2, 1994 and April 3, 1993 (unaudited) Consolidated Statement of Income....................................... F-33 Consolidated Statement of Cash Flows................................... F-35 Notes to Consolidated Condensed Financial Statements..................... F-36
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholdersof Montgomery Ward Holding Corp.: We have audited the accompanying consolidated balance sheet of Montgomery Ward Holding Corp. (a Delaware Corporation) and Subsidiary as of January 1, 1994 and January 2, 1993, and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal years ended January 1, 1994, January 2, 1993 and December 28, 1991. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Montgomery Ward Holding Corp. and Subsidiary as of January 1, 1994 and January 2, 1993, and the results of their operations and their cash flows for the fiscal years ended January 1, 1994, January 2, 1993 and December 28, 1991, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 9 to the consolidated financial statements, effective December 29, 1991, the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes. Arthur Andersen & Co. Chicago, Illinois, February 15, 1994 F-2 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF INCOME (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JANUARY 1, JANUARY 2, DECEMBER 28, 1994 1993 1991 ------------ ------------ ------------ Revenues Net sales, including leased and li- censed department sales............. $5,602 $5,402 $5,294 Direct response marketing revenues, including insurance................. 400 379 360 ------ ------ ------ Total Revenues..................... 6,002 5,781 5,654 ------ ------ ------ Costs and Expenses Cost of goods sold, including net oc- cupancy and buying expense.......... 4,225 4,018 3,922 Benefits, losses, and expenses of di- rect response operations (Note 11).. 300 286 275 Operating, selling, general and ad- ministrative expenses (Notes 8 and 19)................................. 1,274 1,282 1,226 Interest expense, net of investment income (Note 18).................... 43 45 56 ------ ------ ------ Total Costs and Expenses........... 5,842 5,631 5,479 ------ ------ ------ Income Before Income Taxes............. 160 150 175 Income Tax Expense (Note 9)............ 59 50 40 ------ ------ ------ Net Income before cumulative effect of changes in accounting principles...... 101 100 135 Cumulative Effect of Changes in Ac- counting Principles: Income Taxes (Note 9)................ -- 50 -- Postretirement Benefits, net (Note 6).................................. -- (90) -- ------ ------ ------ Net Income............................. 101 60 135 Preferred Stock Dividend Requirements (Note 14)............................. -- 8 13 ------ ------ ------ Net Income Applicable to Common Shareholders...................... $ 101 $ 52 $ 122 ====== ====== ====== Net Income Per Class A Common Share be- fore cumulative effect of changes in accounting principles................. $ 2.29 $ 2.01 $ 2.40 Cumulative effect of changes in ac- counting principles................... -- (.88) -- ------ ------ ------ Net Income per Class A Common Share (Note 15)......................... $ 2.29 $ 1.13 $ 2.40 ====== ====== ====== Net Income Per Class B Common Share be- fore cumulative effect of changes in accounting principles................. $ 2.04 $ 1.87 $ 2.48 Cumulative effect of changes in ac- counting principles................... -- (.82) -- ------ ------ ------ Net Income per Class B Common Share (Note 15)......................... $ 2.04 $ 1.05 $ 2.48 ====== ====== ====== Cash Dividends declared per Common Share Class A.............................. $ .50 $ .25 -- Class B.............................. $ .50 $ .25 --
See notes to consolidated financial statements. F-3 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED BALANCE SHEET (MILLIONS OF DOLLARS)
JANUARY 1, JANUARY 2, 1994 1993 ---------- ---------- ASSETS Cash and cash equivalents................................ $ 98 $ 81 Short-term investments................................... 19 11 Investments of insurance operations (Note 4)............. 296 277 ------ ------ Total Cash and Investments........................... 413 369 Trade and other accounts receivable...................... 62 47 Accounts and notes receivable from affiliates (Note 3)... 4 18 ------ ------ Total Receivables.................................... 66 65 Federal income taxes receivable (Note 9)................. -- 3 Merchandise inventories (Note 5)......................... 1,242 1,038 Prepaid pension contribution (Note 6).................... 310 291 Properties, plants and equipment, net of accumulated depreciation and amortization (Note 7).................. 1,263 1,222 Direct response and insurance acquisition costs.......... 295 280 Other assets (Note 8).................................... 246 217 ------ ------ Total Assets......................................... $3,835 $3,485 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Trade accounts payable................................... $1,358 $1,210 Federal income taxes payable (Note 9).................... 7 -- Accrued liabilities and other obligations (Notes 3, 6, 10, 11 and 15).......................................... 1,197 1,148 Insurance policy claim reserves (Notes 2 and 11)......... 237 241 Long-term debt (Note 12)................................. 213 125 Obligations under capital leases (Note 13)............... 89 95 Deferred income taxes (Note 9)........................... 127 113 ------ ------ Total Liabilities.................................... 3,228 2,932 Commitments and Contingent Liabilities (Notes 12, 20 and 21) Shareholders' Equity (Note 15) Common stock........................................... -- -- Capital in excess of par value......................... 19 16 Retained earnings...................................... 658 580 Unrealized gain on marketable equity securities........ 3 3 Less: Treasury stock, at cost.......................... (73) (46) ------ ------ Total Shareholders' Equity........................... 607 553 ------ ------ Total Liabilities and Shareholders' Equity........... $3,835 $3,485 ====== ======
See notes to consolidated financial statements. F-4 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
CLASS A CLASS B TOTAL COMMON COMMON CAPITAL IN TREASURY SHARE- STOCK $.01 STOCK $.01 EXCESS OF RETAINED UNREALIZED STOCK, HOLDERS' PAR VALUE PAR VALUE PAR VALUE EARNINGS GAINS AT COST EQUITY ---------- ---------- ---------- -------- ---------- -------- -------- (NUMBER OF SHARES IN THOUSANDS) Balance, December 29, 1990................... 23,885.1 25,000.0 $10 $417 $-- $ (6) $421 Net income.............. -- -- -- 135 -- -- 135 Cash dividends paid..... -- -- -- (13) -- -- (13) Tax benefit of stock op- tion exercises and other share exchanges.. -- -- 3 -- -- -- 3 Change in unrealized gain on marketable eq- uity securities........ -- -- -- -- 2 -- 2 Shares repurchased as Treasury stock......... (2,771.7) -- -- -- -- (28) (28) Shares issued upon exer- cise of options........ 73.5 -- -- -- -- -- -- Shares issued upon exer- cise of conversion rights...... 3.4 -- -- -- -- -- -- -------- -------- --- ---- --- ---- ---- Balance, December 28, 1991................... 21,190.3 25,000.0 $13 $539 $ 2 $(34) $520 Cumulative effect of changes in accounting principles.. -- -- -- (40) -- -- (40) -------- -------- --- ---- --- ---- ---- Balance, December 29, 1991 as restated....... 21,190.3 25,000.0 13 499 2 (34) 480 Net income before cumu- lative effect of changes in accounting principles............. -- -- -- 100 -- -- 100 Cash dividends paid..... -- -- -- (19) -- -- (19) Tax benefit of stock op- tion exercises and other share exchanges.. -- -- 2 -- -- -- 2 Change in unrealized gain on marketable eq- uity securities........ -- -- -- -- 1 -- 1 Shares repurchased as Treasury stock......... (777.7) -- -- -- -- (12) (12) Shares issued upon exer- cise of options........ 256.4 -- 1 -- -- -- 1 Shares issued upon exer- cise of conversion rights...... 3.4 -- -- -- -- -- -- -------- -------- --- ---- --- ---- ---- Balance, January 2, 1993................... 20,672.4 25,000.0 $16 $580 $ 3 $(46) $553 Net income.............. -- -- -- 101 -- -- 101 Cash dividends paid..... -- -- -- (23) -- -- (23) Tax benefits of stock option exercises and other share exchanges.. -- -- 2 -- -- -- 2 Shares repurchased as Treasury stock......... (1,258.7) -- -- -- -- (27) (27) Shares issued upon exer- cise of options........ 192.9 -- 1 -- -- -- 1 Shares issued upon exer- cise of conversion rights................. 3.4 -- -- -- -- -- -- -------- -------- --- ---- --- ---- ---- Balance, January 1, 1994................... 19,610.0 25,000.0 $19 $658 $ 3 $(73) $607 ======== ======== === ==== === ==== ====
See notes to consolidated financial statements. F-5 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (MILLIONS OF DOLLARS)
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JAN. 1, JAN. 2, DEC. 28, 1994 1993 1991 ------------ ------------ ------------ Cash flows from operating activities: Net income before cumulative effect of changes in accounting principles...... $ 101 $ 100 $ 135 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization......... 98 97 95 Deferred income taxes................. 25 32 (16) Changes in operating assets and liabil- ities: (Increase) decrease in: Trade and other accounts receivable.. (9) 9 9 Accounts and notes receivable from affiliates.......................... 14 (1) 12 Merchandise inventories.............. (204) (38) (73) Prepaid pension contribution......... (19) (18) (17) Other assets......................... (53) 55 5 Increase (decrease) in: Accounts and notes payable to affili- ates................................ -- (30) 11 Trade accounts payable............... 148 (17) 64 Accrued liabilities and other obliga- tions............................... 33 21 35 Federal income taxes payable, net.... (1) (34) (8) Insurance policy claim reserves...... (4) (21) (28) ------ ------- ------- Net cash provided by operations... 129 155 224 ------ ------- ------- Cash flows from investing activities: Purchase of short-term investments..... (248) (1,221) (2,128) Purchase of investments of insurance operations............................ (688) (707) (751) Sale of short-term investments......... 240 1,367 2,183 Sale of investments of insurance opera- tions................................. 669 698 729 Disposition of properties, plants and equipment, net........................ 3 7 3 Sale of assets held for disposition.... 3 2 2 Capital expenditures................... (142) (146) (128) ------ ------- ------- Net cash used for investing activ- ities............................ (163) -- (90) ------ ------- ------- Cash flows from financing activities: Proceeds from issuance of short-term borrowings............................ 7,718 1,823 -- Payments on short-term borrowings...... (7,718) (1,823) -- Proceeds from issuance of long-term borrowings............................ 100 -- -- Payments of long-term debt............. (12) (396) (130) Payments of obligations under capital leases................................ (6) (7) (7) Proceeds from issuance of common stock. 1 1 -- Payments to redeem preferred stock..... -- (90) -- Cash dividends paid.................... (23) (19) (13) Purchase of treasury stock, at cost.... (11) (7) (7) Tax benefit of stock options exercised and other share exchanges............. 2 2 3 ------ ------- ------- Net cash provided by (used for) financing activities............. 51 (516) (154) ------ ------- ------- Increase (decrease) in cash and cash equivalents............................ 17 (361) (20) Cash and cash equivalents at beginning of period.............................. 81 442 462 ------ ------- ------- Cash and cash equivalents at end of pe- riod................................... $ 98 $ 81 $ 442 ====== ======= =======
See notes to consolidated financial statements. F-6 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN MILLIONS) 1. COMPANY FORMATION Montgomery Ward Holding Corp. (the Company or MW Holding), formerly BFB Acquisition Corp., was formed on February 8, 1988, for the purpose of acquiring all of the outstanding stock of Montgomery Ward & Co., Incorporated (Montgomery Ward) from Marcor Inc. (Marcor), a wholly-owned subsidiary of Mobil Corporation (Mobil). 2. MAJOR ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the Company and all subsidiaries. Certain prior period amounts have been reclassified to be comparable with the current period presentation. In addition, income from investments of insurance operations was reclassified from Interest expense, net to Direct response marketing revenues for all periods presented. Business Segments The Company and its subsidiaries are engaged in retail merchandising and direct response marketing (including insurance) in the United States. Retail merchandising operations are conducted primarily through Montgomery Ward, while direct response marketing operations are conducted primarily through Signature Financial/Marketing, Inc. (Signature), a wholly-owned subsidiary of Montgomery Ward. Signature markets consumer club products and insurance products through its subsidiaries. See Note 22 for information regarding these segments. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, time deposits and highly liquid debt instruments with a maturity of three months or less from the date of purchase. The carrying amount reported in the financial statements for cash and cash equivalents approximates the fair value of these assets. Following is a summary of cash payments for interest and income taxes and non-cash financing and investing activities:
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JAN. 1, JAN. 2, DEC. 28, 1994 1993 1991 ------------ ------------ ------------ Cash paid for: Income taxes.......................... $ 46 $ 53 $ 55 Interest.............................. $ 55 $ 50 $ 70 Non-cash financing activities: Notes issued for purchase of Treasury stock................................ $ 16 $ 5 $ 21 Non-cash investing activities: Change in unrealized gain on market- able equity securities............... $ -- $ 1 $ 2 Like-kind exchange of assets.......... $ 6 $ -- $ --
The net cumulative effect of changes in accounting principles of $40 in 1992 has no cash impact. F-7 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 2. MAJOR ACCOUNTING POLICIES (CONTINUED) Investments In 1993, the FASB issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS No. 115), which is effective for fiscal years beginning after December 15, 1992. The Company plans to adopt this statement during 1994. All of the debt securities are classified as "available-for-sale" and will be stated at fair market value with all changes in unrealized gains or losses included in Shareholders' Equity under FAS No. 115. Due to the nature of FAS No. 115 and the volatility of the market, the impact of adoption of this statement is not reasonably estimable at this time. Investments of Insurance Operations Fixed maturities (bonds and redeemable preferred stock) and mortgage loans are stated at amortized cost. Equity securities (common stock and nonredeemable preferred stock) are stated at market. Policy loans and mortgages are carried at face value. Merchandise Inventories Merchandise inventories are valued at the lower of cost or market, using the retail last-in, first-out (LIFO) method. Depreciation, Amortization and Repairs Depreciation is computed on a straight-line basis over the estimated useful lives of the properties, with annual rates ranging between 2% and 3% for buildings and between 12% and 25% for fixtures and equipment. Leasehold improvements and assets under capital leases are amortized on a straight-line basis over no longer than the primary term of the lease. Upon retirement or disposition, the cost and the related depreciation or amortization are removed from the accounts, with the gains or losses included in income. Interest relating to construction in progress is capitalized and amortized over the useful life of the property. Pre-operating expenditures which are not capital in nature are charged against income in the year the store is opened. Normal maintenance and repairs are expensed as incurred. Major repairs that materially extend the lives of properties are capitalized, and the assets replaced, if any, are retired. Direct Response Marketing Revenues Life and accident and health insurance premiums, which are recognized as revenue when due from policyholders, are associated with related benefits and expenses to result in the recognition of profit over the terms of the policies. Property-liability insurance premiums and club membership dues are deferred and earned on a pro rata basis over the terms of the policies and memberships. Unearned premiums and club memberships of $53 and $52 at January 1, 1994 and January 2, 1993, respectively, are included in Accrued liabilities and other obligations. Direct Response and Insurance Acquisition Costs Costs allocated to the insurance and club memberships in force at June 24, 1988 (the acquisition date), as well as the costs of acquiring new club memberships and insurance business (primarily marketing expenses), are included in Direct response and insurance acquisition costs. Costs of acquiring new business have been deferred when considered recoverable. F-8 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 2. MAJOR ACCOUNTING POLICIES (CONTINUED) Acquisition costs are amortized over the premium-paying periods of the related policies in proportion to the anticipated premium revenue to be recognized. Amortization charged to income was $111, $106 and $89 for 1993, 1992 and 1991, respectively, and is included in Benefits, losses and expenses of direct response operations. Interest Rate Exchange and Cap Agreements Amounts paid or received pursuant to interest rate exchange and cap agreements are deferred and amortized as interest expense or income over the remaining life of the applicable agreement. Insurance Policy Claim Reserves Liabilities for future policy benefits have been determined principally by the net level premium method. These amounts have been computed by using assumptions that include provisions for risk of adverse deviation. The assumptions developed for interest rates (average 6%-8%) and withdrawal rates are based on the experience of Montgomery Ward Life Insurance Company, a wholly-owned subsidiary of Signature. The principal mortality tables used to develop the assumed mortality rates are the 1960 Commissioners' Standard Group Table, the 1955-1960 and 1965-1970 Basic Mortality Tables and the 1969-1971 U.S. Life Tables. The reserve for claims and related adjustment expenses is based on estimates of the costs of individual claims reported and incurred but not reported prior to year-end. While management believes the reserve for claims and related adjustment expenses is adequate, the reserve is continually reviewed and as adjustments become necessary, they are reflected in current operations. In December, 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This statement was adopted in 1993. The statement eliminated the reporting of assets and liabilities relating to reinsured contracts net of the effects of reinsurance and required that reinsurance recoverables (including amount related to claims incurred but not reported) and prepaid reinsurance premiums be reported as assets. The adoption of this statement has no impact on the results of operations. The prior year's financial statements were restated to reflect the reclassification of reinsurance credits of $52 from Insurance policy claims reserves to Other Assets. Federal Income Tax The Company and its subsidiaries, with the exception of certain of its insurance subsidiaries, file a consolidated Federal income tax return. These insurance subsidiaries are eligible to be included in the consolidated return in 1994. Prior to 1992, the Company determined its income tax expense and related deferred federal income taxes in accordance with Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes" (FAS 96). Effective December 29, 1991, the Company adopted the provisions of FAS 109, "Accounting for Income Taxes". See Note 9 for discussion of the impact on financial position and results of operations resulting from the adoption of FAS 109. F-9 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 2. MAJOR ACCOUNTING POLICIES (CONTINUED) Postemployment Benefits In 1992, the Financial Accounting Standards Board (FASB) issued Statement No. 112, "Employers' Accounting for Postemployment Benefits". As the Company currently accounts for severance and other related postemployment costs under the accrual method, the adoption of FAS 112 will have no material impact on the financial statements. 3. ACCOUNTS AND NOTES RECEIVABLE FROM AFFILIATES Montgomery Ward and Montgomery Ward Credit Corporation, a subsidiary of GE Capital (Montgomery Ward Credit) have entered into an Account Purchase Agreement pursuant to which Montgomery Ward Credit purchases receivables from time to time and provides services to Montgomery Ward. Under this agreement, Montgomery Ward Credit has the exclusive right to operate the Montgomery Ward private label credit card system and is obligated to purchase (and Montgomery Ward is obligated to sell) all the receivables generated by the Montgomery Ward private label credit card system, up to $6,000 at any time outstanding, for their face value. Montgomery Ward accounts for the transfer as a sale of the applicable receivables. Sales of receivables to Montgomery Ward Credit were $3,991, $3,489 and $3,541 for 1993, 1992 and 1991, respectively. At January 1, 1994 and January 2, 1993, there were $4,947 and $4,783 of Montgomery Ward credit card receivables owned by Montgomery Ward Credit, respectively. Amounts receivable from Montgomery Ward Credit pursuant to the sale of such receivables are included in Accounts and notes receivable from affiliates. Montgomery Ward is exposed to both market risk and credit risk under the Account Purchase Agreement. Under the Account Purchase Agreement, Montgomery Ward is required to pay Montgomery Ward Credit the excess interest costs on a monthly basis if a blended interest rate applicable to Montgomery Ward Credit's finance costs with respect to the receivables exceeds 10% per annum. To date, the blended interest rate has been less than 10%. Should Montgomery Ward Credit or its guarantor, GE Capital, fail to perform its obligations under the Account Purchase Agreement, Montgomery Ward would suffer an accounting loss up to the amount of Montgomery Ward Credit's share of defaulted indebtedness (as described below), net of applicable reserves carried by Montgomery Ward Credit. Montgomery Ward estimates that any accounting loss would be immaterial at January 1, 1994. Montgomery Ward Credit's obligations under the Account Purchase Agreement are not collateralized. The risk of credit losses is shared by Montgomery Ward and Montgomery Ward Credit. Montgomery Ward Credit bears the risk up to 3.9% (the prime layer), Montgomery Ward bears the risk in excess of such prime layer up to 5%, Montgomery Ward and Montgomery Ward Credit equally share losses between 5% and 8%, and Montgomery Ward Credit bears the losses in excess of 8% of average gross receivables. Actual credit losses were 5.5% for 1993, 5.8% for 1992 and 4.9% for 1991. Under the terms of the Account Purchase Agreement, a portion of Montgomery Ward's 1991 liability for credit losses and its liabilities for credit losses for 1992 through 1997 are payable to Montgomery Ward Credit in early 1998. The amounts for periods ending through 1997 will be included in notes which bear interest at a rate similar to rates Montgomery Ward pays for comparable borrowings. In exchange for Montgomery Ward's agreement to allow Montgomery Ward Credit to increase finance charge rates in selected states, Montgomery Ward receives a share of incremental finance charges resulting from such F-10 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) increases. Incremental finance charges are generated only on purchases subsequent to the date such finance charge rates are increased. During 1992, rates were increased in certain states effective July 1 and October 1. Montgomery Ward's share is available for offset against the notes payable in early 1998, and bears interest at the same rate and for the same term as the notes payable to Montgomery Ward Credit. Notes payable applicable to credit losses for 1991, 1992 and 1993 were $108 and the finance charge offset applicable to those notes was $9. During the first quarter of 1994, a payment of $35 was made towards the amounts due under the Account Purchase Agreement. Under the agreement, the notes payable to Montgomery Ward Credit are limited to $300 at any time with any excess to be paid currently in cash. The Company does not expect credit losses for the period through 1997 to exceed the $300 limitation. In addition, legislation has from time to time been introduced in certain states which, if enacted, may require rescinding all or a portion of such rate increases, in which case Montgomery Ward's share of rate increases may be substantially reduced. In the event that, due to the increase in finance charge rates, any refunds are required to be made, Montgomery Ward and Montgomery Ward Credit have agreed to share the financial risk. The allowance for estimated losses to be borne by Montgomery Ward, as well as the unpaid portion applicable to 1991, 1992 and 1993, offset by Montgomery Ward's share of the finance charges is included in Accrued liabilities and other obligations. The Account Purchase Agreement will be in effect until December 31, 2004, and thereafter from year to year unless either party gives ten years prior notice of its election to terminate. F-11 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 4.INVESTMENTS OF INSURANCE OPERATIONS Following is a summary of Investments of insurance operations in securities other than related party investments. The fair values for marketable debt and equity securities are based on quoted market prices.
JANUARY 1, 1994 ----------------------------------------------- AMOUNT AT GROSS GROSS WHICH UNREALIZED UNREALIZED MARKET SHOWN IN TYPE OF INVESTMENT COST GAINS LOSSES VALUE BALANCE SHEET ------------------ ---- ---------- ---------- ------ ------------- Fixed maturities: Bonds: United States Government and government agencies and authorities........... $ 67 $ 3 $ -- $ 70 $ 67 Public utilities........... 80 16 -- 96 80 All other corporate bonds.. 26 1 -- 27 26 ---- --- ---- ---- ---- Total fixed maturities .. $173 $20 $ -- $193 173 ---- === ==== ==== ---- Equity securities: Common stock................. 8 $ 5 $ 13 13 ---- --- ---- ---- Total equity securities.... 8 $ 5 $ 13 13 ---- === ==== ---- Mortgage loans................. 64 64 Policy loans................... 7 7 Short-term investments......... 39 39 ---- ---- Total Investments.......... $291 $296 ==== ==== JANUARY 2, 1993 ----------------------------------------------- AMOUNT AT GROSS GROSS WHICH UNREALIZED UNREALIZED MARKET SHOWN IN TYPE OF INVESTMENT COST GAINS LOSSES VALUE BALANCE SHEET ------------------ ---- ---------- ---------- ------ ------------- Fixed maturities: Bonds: United States Government and government agencies and authorities........... $ 77 $ 3 $ -- $ 80 $ 77 Public utilities........... 83 16 -- 99 83 All other corporate bonds.. 40 1 -- 41 40 ---- --- ---- ---- ---- Total fixed maturities... $200 $20 $ -- $220 200 ---- === ==== ==== ---- Equity securities: Common stock................. 9 $ 4 $ 13 13 ---- --- ---- ---- Total equity securities.... 9 $ 4 $ 13 13 ---- === ==== ---- Mortgage loans................. 31 31 Policy loans................... 7 7 Short-term investments......... 26 26 ---- ---- Total Investments.......... $273 $277 ==== ====
F-12 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 4. INVESTMENTS OF INSURANCE OPERATIONS (CONTINUED) The amounts of fixed maturities as of January 2, 1993 are as follows:
AMORTIZED MARKET COST VALUE --------- ------ Due in 1994.............................................. $ 27 $ 28 Due in 1995 through 1999................................. 102 112 Due in 2000 through 2004................................. 43 52 Due in 2005 and beyond................................... 1 1 ---- ---- $173 $193 ==== ====
5. MERCHANDISE INVENTORIES Merchandise inventories are valued using the retail LIFO method, which matches current costs with current sales. If inventories had been valued using the first-in, first-out (FIFO) method, they would have been $117, $104, and $93 higher than those reported as of January 1, 1994, January 2, 1993, and December 28, 1991, respectively. 6. RETIREMENT PLANS Retirement plans of a contributory nature cover a majority of full-time associates of Montgomery Ward and its subsidiaries. Retirement benefits are provided by a defined benefit pension plan as well as by a savings and profit sharing plan. Montgomery Ward and its subsidiaries contribute to the defined benefit pension plan to cover any excess of defined minimum benefits over the benefits available from the savings and profit sharing plan attributable to the accumulated value of associate contributions. The components of the pension credit were as follows:
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JANUARY 1, 1994 JANUARY 2, 1993 DECEMBER 28, 1991 --------------- --------------- ----------------- Service cost-benefits earned during the period................. $(11) $ (9) $ (8) Interest cost on pro- jected benefit obligation............. (45) (44) (47) Actual return on assets. 101 (20) 93 Deferral of unantici- pated investment performance............ (26) 91 (21) ---- ---- ---- Net pension credit.. $ 19 $ 18 $ 17 ==== ==== ==== Assumptions: Discount rate......... 8.5% 9.0% 9.0% Increase in future compensation......... 6.0% 6.0% 6.0% Rate of return on plan assets............... 9.5% 9.0% 10.5%
F-13 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 6. RETIREMENT PLANS (CONTINUED) The funded status of the defined benefit pension plans was as follows:
JANUARY 1, JANUARY 2, 1994 1993 ---------- ---------- Actuarial present value of accumulated benefit obliga- tion: Vested................................................. $565 $523 Nonvested.............................................. 4 6 ---- ---- Accumulated benefit obligation......................... 569 529 Additional amounts related to projected increases in compensation levels................................... 9 13 ---- ---- Projected benefit obligation........................... 578 542 Plan assets at fair value, primarily in equity and fixed income securities............................... 863 802 ---- ---- Plan assets in excess of projected benefit obligation.. $285 $260 ==== ==== Consisting of: Unrecognized net loss since initial application of FAS 87.................................................... $(28) $(34) Unrecognized prior service cost since initial applica- tion of FAS 87........................................ $ 3 $ 3 Prepaid pension contribution........................... $310 $291
The projected benefit obligation was determined using an assumed discount rate of 7.5% and 8.5% at January 1, 1994 and January 2, 1993, respectively, and an assumed rate of increase in future compensation levels of 6%. Unrecognized net gains and losses and prior service costs are amortized over the average future service period. The savings and profit sharing plan includes a voluntary savings feature for eligible associates and matching company contributions based on a fixed percentage of certain associates' contributions. The company matching expense was $6 for each of 1993, 1992 and 1991. Substantially all associates who retire after participation in the retirement plan for ten years and who are members of the health care plan for the year prior to retirement are eligible for certain health care and life insurance benefits, the cost of which is shared with the retirees. In 1992, the Company established a limit on its future annual contributions on behalf of retirees at a maximum of 125% of the projected 1992 company contributions. During 1993, the Company substantially increased contributions required of retirees. In the fourth quarter of 1992, the Company decided to adopt Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" as of December 29, 1991. This statement requires the accrual of the cost of providing postretirement benefits, including medical and life insurance coverage, during the active service period of the associate. The Company elected to immediately recognize the accumulated postretirement liability. This resulted in a one-time, after- tax charge of $90 (after reduction for income taxes of $59). The effect of this change on 1992 was not material. The pro forma effect of the change on years prior to 1992 is not determinable. Prior to 1992, the Company recognized expense in the year the benefits were provided. F-14 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 6. RETIREMENT PLANS (CONTINUED) The components of the net periodic postretirement benefit cost for 1993 and 1992 were as follows:
1993 1992 ---- ---- Service Cost............... $ 2 $ 2 Interest cost on accumu- lated postretirement bene- fit obligation............ 12 12 --- --- Net periodic postretirement benefit cost.................. $14 $14 === ===
The status of the Company's liability for postretirement benefits at January 1, 1994 and January 2, 1993, which are included in Accrued liabilities and other obligations is as follows:
JANUARY 1, JANUARY 2, 1994 1993 ---------- ---------- Accumulated postretirement benefit obligation: Retirees......................................... $120 $108 Fully eligible active associates................. 20 19 Other active associates.......................... 25 23 ---- ---- Total accumulated postretirement benefit obliga- tion.............................................. 165 150 Unrecognized loss.................................. (22) (5) ---- ---- Accrued postretirement benefit obligation.......... $143 $145 ==== ====
The weighted average discount rate used in measuring the accumulated postretirement benefit obligation was 7.5% and 8.5% at January 1, 1994 and January 2, 1993, respectively. The assumed health care cost trend rate was not applicable due to the caps established on current cost levels during 1993. In 1992, the assumed health care cost trend rate was 12% grading to 6% over 6 years for participants below age 65, and 6% for participants age 65 or older. The impact of a 1% increase in the medical trend rate on both the accumulated postretirement benefit obligation and service cost and interest cost for 1993 is not applicable due to caps established on costs during 1993. The Company continues to evaluate ways in which it can better manage retiree benefits and control the costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and annual expense. F-15 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 7. PROPERTIES, PLANTS AND EQUIPMENT The details of the properties, plants and equipment accounts are shown below at cost.
BALANCE AT RETIREMENTS BALANCE BEGINNING ADDITIONS OR SALES AT CLOSE OF PERIOD AT COST AT COST OTHER OF PERIOD ---------- --------- ----------- ----- --------- For the 52-week period ended December 28, 1991: Land....................... $ 160 $ 4 $-- $(1) $ 163 Buildings.................. 653 53 -- (6) 700 Leasehold improvements..... 213 17 3 -- 227 Fixtures and equipment..... 236 54 2 -- 288 Assets under capital leases.................... 119 -- 1 -- 118 ------ ---- --- --- ------ Total.................... $1,381 $128 $ 6 $(7) $1,496 ====== ==== === === ====== For the 53-week period ended January 2, 1993: Land....................... $ 163 $ 13 $ 1 $(1) $ 174 Buildings.................. 700 51 2 (3) 746 Leasehold improvements..... 227 30 2 (1) 254 Fixtures and equipment..... 288 52 5 -- 335 Assets under capital leases.................... 118 -- 2 (2) 114 ------ ---- --- --- ------ Total.................... $1,496 $146 $12 $(7) $1,623 ====== ==== === === ====== For the 52-week period ended January 1, 1994: Land....................... $ 174 $ 3 $-- $-- $ 177 Buildings.................. 746 32 -- -- 778 Leasehold improvements..... 254 38 (3) -- 289 Fixtures and equipment..... 335 69 (3) -- 401 Assets under capital leases.................... 114 -- (1) -- 113 ------ ---- --- --- ------ Total.................... $1,623 $142 $ 7 $-- $1,758 ====== ==== === === ======
F-16 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 7. PROPERTIES, PLANTS AND EQUIPMENT (CONTINUED) The details of the accumulated depreciation and amortization of properties, plants and equipment are shown below.
BALANCE AT RETIREMENTS BALANCE BEGINNING ADDITIONS OR SALES AT CLOSE OF PERIOD AT COST AT COST OTHER OF PERIOD ---------- --------- ----------- ----- --------- For the 52-week period ended December 28, 1991: Buildings.................. $ 60 $29 $-- $(1) $ 88 Leasehold improvements..... 46 14 1 -- 59 Fixtures and equipment..... 90 43 1 -- 132 Assets under capital leases.................... 23 9 1 -- 31 ---- --- --- --- ---- Total.................... $219 $95 $ 3 $(1) $310 ==== === === === ==== For the 53-week period ended January 2, 1993: Buildings.................. $ 88 $24 $-- $(1) $111 Leasehold improvements..... 59 17 1 -- 75 Fixtures and equipment..... 132 46 2 -- 176 Assets under capital leases.................... 31 10 2 -- 39 ---- --- --- --- ---- Total.................... $310 $97 $ 5 $(1) $401 ==== === === === ==== For the 52-week period ended January 1, 1994: Buildings.................. $111 $23 $-- $-- $134 Leasehold improvements..... 75 21 1 -- 95 Fixtures and equipment..... 176 49 2 -- 223 Assets under capital leases.................... 39 5 1 -- 43 ---- --- --- --- ---- Total.................... $401 $98 $ 4 $-- $495 ==== === === === ====
Amounts shown as "Other" represent the transfer of certain properties, plants and equipment to Other assets. Losses on the sale of properties were $2 for 1992 and $1 for 1991, respectively. Expenditures for maintenance and repairs were $122, $115 and $105 for 1993, 1992 and 1991, respectively. 8. OTHER ASSETS During the fourth quarter of 1991, the Company sold its 14.7% investment in Office Max, Inc. for $30. The sale resulted in a net pretax gain of $17 and is included in 1991 Operating, selling, general and administrative expenses. A note bearing interest at 5.25% was received as proceeds and was classified as Other Assets at December 28, 1991. The note was paid on January 15, 1992. 9. INCOME TAXES In the fourth quarter of 1992, the Company decided to adopt FAS 109, "Accounting for Income Taxes", as of December 29, 1991 and all quarterly financial data was restated, accordingly. The cumulative effect on prior years' net income of the adoption of this statement was a credit of $50. Prior years' financial statements have not been restated to apply the provisions of FAS 109. F-17 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 9. INCOME TAXES (CONTINUED) An operating loss carryforward available for Federal income tax purposes of $5 at December 29, 1990 was utilized in 1991. In addition, the Company has alternative minimum tax (AMT) credits of $31, $31 and $21 as of January 1, 1994, January 2, 1993 and December 28, 1991, respectively, available to offset future Federal income tax liabilities. The approximate tax effects of temporary differences and carryforwards that give rise to the deferred tax liability at January 1, 1994 are as follows: Postretirement benefits........................................... $ (56) Accrued liabilities............................................... (222) Other deferred tax assets......................................... (27) ----- Total deferred tax assets..................................... (305) ----- Pension credit.................................................... 121 Direct response and insurance acquisition costs................... 114 Property, plants and equipment.................................... 133 Other deferred tax liabilities.................................... 68 ----- Total deferred tax liabilities................................ 436 ----- AMT credits....................................................... (31) Valuation allowance............................................... 27 ----- Net deferred tax liability.................................... $ 127 =====
Income tax expense consists of:
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JAN. 1, 1994 JAN. 2, 1993 DEC. 28, 1991 ------------ ------------ ------------ Federal Currently payable................. $28 $15 $ 42 Deferred.......................... 25 32 (16) State, local and foreign............ 6 3 14 --- --- ---- Total income tax expense........ $59 $50 $ 40 === === ==== A reconciliation of the statutory to effective federal income tax rate is as follows: 52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JAN. 1, 1994 JAN. 2, 1993 DEC. 28, 1991 ------------ ------------ ---------------- Federal income tax rate............. 35% 34% 34% State taxes, net of reduction of Federal tax........................ 2 1 5 Targeted Jobs Tax Credit............ (1) (2) (1) Impact of increase in statutory rate............................... 1 -- -- Benefit of financial reporting oper- ating loss carryforwards, net...... -- -- (15) --- --- ---- Effective income tax rate........... 37% 33% 23% === === ====
F-18 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 9. INCOME TAXES (CONTINUED) The Company has filed a protest relating to a Federal income tax assessment by the Internal Revenue Service for the short tax year ended December 31, 1988. The Company believes that its ultimate tax liability will be significantly less than the amounts assessed or which may be assessed in future years relating to the disputed issues. Accordingly, management believes that the disposition of the disputed Federal issues will have no material impact on future earnings. Montgomery Ward and the State of California have settled income tax assessments for the taxable years 1978 through 1988. As Montgomery Ward previously provided for these assessments, there will be no further impact on future earnings or financial position. 10. DEFERRED SERVICE CONTRACT REVENUE The Company accounts for sales of product service contracts in accordance with FASB Technical Bulletin 90-1, "Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts", and recognizes the revenue related to those sales in proportion to the costs expected to be incurred in performing services under the contracts. Deferred service contract revenue of $239 and $210 at January 1, 1994 and January 2, 1993, respectively, is included in Accrued liabilities and other obligations. F-19 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 11. INSURANCE POLICY CLAIM RESERVES The Company's insurance subsidiaries are involved in both the cession and assumption of reinsurance with other companies. Risks are reinsured with other companies to permit the recovery of a portion of the direct losses. These reinsured risks are treated as though, to the extent of the reinsurance, they are risks for which the Company is not liable. Policy related liabilities and accruals, including incurred but not reported claims, are included in the financial statements net of reinsurance ceded. The Company remains liable to the extent the reinsuring companies cannot meet their obligations under these reinsurance treaties. In 1992, the Financial Accounting Standards Board (FASB) issued Statement No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts", which applies to financial statements for fiscal years beginning after December 15, 1992. This statement precludes the reporting of assets and liabilities relating to reinsured contracts net of the effects of reinsurance. The Company adopted FAS 113 during fiscal 1993 which had no impact on the results of operations of the Company. The prior years' financial statements were restated to reflect the reclassification of credits for reinsurance of $52 from insurance policy claims reserves to other assets. Premium revenues, which are included in Direct response marketing revenues, are as follows:
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET ------ --------- ---------- ------ ---------- 52-Week Period Ended December 28, 1991: Life insurance in force....... $5,444 $130 $-- $5,314 0.0% ====== ==== === ====== Premiums Life insurance.............. $ 46 $ 1 $ 3 $ 48 6.3% Accident and health insur- ance....................... 65 -- 21 86 24.4% Property and liability in- surance.................... 50 12 -- 38 0.0% ------ ---- --- ------ Total..................... $ 161 $ 13 $24 $ 172 14.0% ====== ==== === ====== 53-Week Period Ended January 2, 1993: Life insurance in force....... $5,325 $114 $-- $5,211 0.0% ====== ==== === ====== Premiums Life insurance.............. $ 45 $ 1 $ 3 $ 47 6.4% Accident and health insur- ance....................... 66 -- 16 82 19.5% Property and liability in- surance.................... 49 8 -- 41 0.0% ------ ---- --- ------ Total..................... $ 160 $ 9 $19 $ 170 11.2% ====== ==== === ====== 52-Week Period Ended January 1, 1994: Life insurance in force....... $5,438 $102 $-- $5,336 0.0% ====== ==== === ====== Premiums Life insurance.............. $ 45 $ 1 $ 3 $ 47 6.4% Accident and health insur- ance....................... 67 -- 13 80 16.3% Property and liability in- surance.................... 51 8 -- 43 0.0% ------ ---- --- ------ Total..................... $ 163 $ 9 $16 $ 170 9.4% ====== ==== === ======
F-20 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 12. LONG-TERM DEBT The long-term debt of Montgomery Ward and its subsidiaries is as follows:
JANUARY 1, JANUARY 2, 1994 1993 ---------- ---------- Montgomery Ward & Co., Incorporated Economic Development Revenue Bonds, due in 1994 at 9.5% interest rate....... $ 5 $ 5 Commercial Development Revenue Bonds, due in 2013 at 4.15% interest rate, adjusted at three-year intervals.. 5 5 Note Purchase Agreements; Senior Notes Series A to Se- ries G due in 1998 to 2005 at 7.07% to 8.18% interest rate................................................... 100 -- Other................................................... 2 2 Montgomery Ward Real Estate Subsidiaries Return 4 3/4% Secured Notes, due serially to January 15, 1995........ 2 4 11 1/2% Secured Note, due serially to September 1, 2001. 17 18 7 1/2% Secured Note, due serially to November 30, 2002.. 7 8 9.45% Secured Notes, due serially to November 30, 2003.. 19 20 7 3/4% Secured Notes, due serially to August 31, 2004... 22 23 7 7/8% Secured Notes, due serially to December 15, 2005. 10 11 9% Secured Notes, due serially to January 1, 2006....... 14 17 Other................................................... 10 12 ---- ---- Total long-term debt................................ $213 $125 ==== ====
The amounts of long-term debt that become due during the fiscal years 1994 through 1998 are as follows: 1994--$13, 1995--$8, 1996--$8, 1997--$9 and 1998-- $20. Montgomery Ward has entered into an Amended and Restated Credit Agreement dated as of September 22, 1992, as amended (Restated Credit Agreement) with various lenders. The Restated Credit Agreement, which expires September 23, 1996, provides for a revolving facility in the principal amount of $350 and imposes various restrictions on Montgomery Ward, including the satisfaction of certain financial tests. Montgomery Ward may select among several interest rate options, including a rate negotiated with one or more of the various lenders. A commitment fee is payable based upon the unused amount of the facility, although in the case of any negotiated rate loan, an additional fee may be payable to the lenders not participating in the negotiated rate loan. As of January 1, 1994, no borrowings were outstanding under the Restated Credit Agreement. Montgomery Ward has also entered into a Short Term Credit Agreement dated as of September 22, 1992, as amended (Short Term Agreement) with various lenders. The Short Term Agreement, which expires September 22, 1994, provides for a revolving facility in the principal amount of $200 and imposes various restrictions on Montgomery Ward, including the satisfaction of certain financial tests. Montgomery Ward may select among several interest rate options, including a rate negotiated with one or more of the various lenders. A commitment fee is payable based upon the unused amount of this facility, although in the case of any negotiated rate loan, an additional fee may be payable to the lenders not participating in the negotiated rate loan. As of January 1, 1994, no borrowings were outstanding under the Short Term Agreement. F-21 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 12. LONG-TERM DEBT (CONTINUED) On March 1, 1993, Montgomery Ward entered into Note Purchase Agreements involving the private placement of $100 of Senior Notes which have maturities of from five to twelve years at fixed interest rates varying from 7.07% to 8.18%. During 1993, Montgomery Ward has also entered into a Term Loan Agreement dated as of November 24, 1993 with various banks (Term Loan Agreement). The Term Loan Agreement provides for a total borrowing capacity of $165 million over a one-year period and is to be repaid upon the fifth anniversary of the Term Loan Agreement. The purpose of this loan is to partially finance the Lechmere acquisition. As of January 1, 1994, no borrowings were outstanding under this agreement. The Restated Credit Agreement, the Short Term Agreement, the Term Loan Agreement and the Note Purchase Agreements (collectively, the Agreements) impose various restrictions on Montgomery Ward, including the satisfaction of certain financial tests which include restrictions on payments of dividends. Under the terms of the Restated Credit Agreement, the Short Term Agreement and the Term Loan Agreement which are currently the most restrictive of the financing agreements as to dividends, distributions and redemptions, Montgomery Ward may not pay dividends or make any other distributions to the Company or redeem any Common Stock in excess of (1) $50 on a cumulative basis, plus (2) 50% of Consolidated Net Income of Montgomery Ward (as defined in the Agreements) after December 28, 1991, plus (3) the amount of any distribution made by Montgomery Ward for the purpose of redeeming the Senior Preferred Stock and the Junior Preferred Stock of the Company (which were redeemed on September 30, 1992), plus (4) capital contributions received by Montgomery Ward after December 28, 1991, plus (5) net proceeds received by Montgomery Ward from (a) the issuance of capital stock including treasury stock but excluding Debt-Like Preferred Stock (as defined in the Agreements), or (b) any indebtedness which is converted into shares of capital stock other than Debt-Like Preferred Stock of Montgomery Ward or the Company, after December 28, 1991, plus (6) an adjustment of $45 for 1993 through 1996, $30 in 1997 and $15 in 1998. To date, Montgomery Ward has been in compliance with all such financial tests. Under these agreements, Montgomery Ward expects to be able to advance the Company sufficient funds to allow the Company to make the required installment payments in 1994 for notes issued to repurchase shares held by former officers and their permitted transferees. Borrowings to date under the Restated Credit Agreement, the Short Term Agreement and the Note Purchase Agreements have been used for working capital purposes, to retire certain indebtedness of Montgomery Ward and to redeem outstanding Preferred Stock of the Company (See Note 14). Effective September 22, 1992, Montgomery Ward prepaid the amount outstanding, $128, under the Subordinated Loan agreement dated as of June 23, 1988 between Montgomery Ward and GE Capital, as amended (Subordinated Loan). Concurrently therewith, Montgomery Ward repaid the amount outstanding, $195, under the Credit Agreement dated as of June 22, 1988 among Montgomery Ward and various banks, as amended (Term Loan). The source of funds for these transactions was sales of short-term investments and borrowings under the Restated Credit Agreement and the Short Term Agreement. Montgomery Ward is exposed to market risk under both the Restated Credit Agreement and Short Term Agreement in the event of an increase in interest rates. To offset this risk, Montgomery Ward has entered into interest rate exchange agreements. The aggregate notional principal amount under the agreements is $50 in 1993. Under the terms of the interest rate exchange agreements, Montgomery Ward pays the banks a weighted average fixed rate of less than 8.5% in 1993 and receives the three-month London interbank offered (LIBO) rate in each case multiplied by the notional principal amount. In 1993, the agreement increased the F-22 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 12. LONG-TERM DEBT (CONTINUED) effective interest rate under the Restricted Credit Agreement and the Short Term Agreement by .88%. The agreement increased the effective interest rate of the Term Loan for 1992 by .89% and increased the effective interest rate under the Restated Credit Agreement and Short-Term Agreement by .80%. The effective interest rate of the Subordinated Loan was unaffected by these agreements in 1992. For 1991, the agreements increased the effective interest rate of the Term Loan by .69% and increased the Subordinated Loan effective interest rate by 1.13%. Montgomery Ward has Commercial Letter of Credit Facilities with various lenders for the purpose of providing documentary letters of credit primarily in connection with the purchase of imported merchandise for an aggregate amount of $405. The facilities expire at various dates through June 1995. Montgomery Ward has outstanding Commercial Development Revenue Bonds, which are adjusted to the market rate of interest at three-year intervals. The rate was adjusted to 4.15% in 1992. The Secured Notes of the real estate subsidiaries are secured by mortgage liens and/or assignments of rental agreements whereby the real estate subsidiaries have assigned to trustees certain monies payable under leases with Montgomery Ward. At January 1, 1994, assets with a net book value of approximately $220 represented collateral for certain of these secured notes. The market value of the Company's long-term debt of $165 is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 13. LEASES The Company leases real and personal property principally through noncancelable capital and operating leases, which generally provide for the payment of minimum rentals and, in certain instances, executory costs and additional rentals based upon a percentage of sales. The terms of the real estate leases typically contain renewal options for additional periods. At January 1, 1994, the minimum lease payments under all noncancelable operating leases with an initial term of more than one year, not including $13 of future sublease rentals, and under capital leases are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- 1994......................................................... $ 15 $ 84 1995......................................................... 15 77 1996......................................................... 14 70 1997......................................................... 13 63 1998......................................................... 13 55 Later Years.................................................. 69 487 ---- ---- Total Minimum Lease Payments............................. $139 $836 ==== Less Executory Costs, principally real estate taxes to be paid by the lessor.......................................... (6) Less Imputed Interest........................................ (44) ---- Present Value of Net Minimum Capital Lease Payments Including Portion due within one year of $7........................... $ 89 ====
F-23 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 13. LEASES (CONTINUED) Net rent expense charged to earnings was $104 for 1993, $101 for 1992 and $95 for 1991 after deducting rentals from subleases of $9 in 1993, $10 in 1992 and $11 in 1991. Rent expense includes contingent lease rentals for capital and operating leases of $11 for 1993, $11 for 1992 and $12 for 1991. These contingent lease rentals are generally based on sales revenues. Some rental agreements contain escalation provisions that may require higher future rent payments. Rent expense incurred under rental agreements which contain escalation clauses is recognized on a straight-line basis over the life of the lease. 14. REDEEMABLE PREFERRED STOCK On June 22, 1988, the Company issued 500 shares of its Senior Preferred Stock and 400 shares of its Junior Preferred Stock to GE Capital for an aggregate purchase price of $50 and $40, respectively. Beginning in the first quarter of 1992, dividends were paid quarterly at an annual rate of $11,500 per share and $12,000 per share for the Senior Preferred Stock and Junior Preferred Stock, respectively. Effective September 30, 1992, Montgomery Ward declared a dividend payable to the Company and the Company redeemed all of its then-outstanding shares of Preferred Stock, including 500 shares of Senior Preferred Stock, par value $1.00 per share, and 400 shares of Junior Preferred Stock, par value $1.00 per share, all of which were held by GE Capital. The aggregate redemption prices for the Senior Preferred Stock and the Junior Preferred Stock were $50 and $40, respectively, and accrued dividends thereon were $3. 15. COMMON STOCK The Company has the following authorized classes of common stock: Class A Common Stock, Series 1; $.01 par value; 25,000,000 shares authorized; 19,481,096 shares issued and outstanding, net of 5,518,904 shares held in treasury. Class A Common Stock, Series 2; $.01 par value; 5,412,000 shares authorized; 128,897 shares issued and outstanding, net of 459,034 shares held in treasury. Class B Common Stock; $.01 par value; 25,000,000 shares authorized, issued and outstanding; all owned by GE Capital. The Company has repurchased 3,905,550 shares held by certain former officers of the Company, Montgomery Ward and Signature and their permitted transferees by making cash payments and issuing installment notes in the aggregate of approximately $54. As of January 1, 1994, the outstanding balance of these notes was $32. These installment notes bear interest at varying rates, are payable over a multi-year period (generally three to five years) and are secured by shares of Common Stock, the fair market value of which is equal to the outstanding principal amount under each note. The notes are classified as Accrued liabilities and other obligations. Under all of the Agreements, Montgomery Ward will be able to advance the Company sufficient funds to allow the Company to make the required installment payments in 1994. Each share of Class B Common Stock entitles the holder thereof to one vote. All shares of Class A Common Stock entitle the holders to a total of 25,000,000 votes, or one vote per share if the total number of Class A shares issued and outstanding is less than 25,000,000. F-24 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 15. COMMON STOCK (CONTINUED) Net income per common share is computed as follows:
52-WEEK PERIOD ENDED JANUARY 1, 1994 --------------------- CLASS A CLASS B ---------- ---------- Earnings available for Common Shareholders............... $ 50 $ 51 Weighted average number of common and common equivalent shares (stock options) outstanding...................... 21,805,203 25,000,000 Earnings per share....................................... $2.29 $2.04 53-WEEK PERIOD ENDED JANUARY 2, 1993 --------------------- CLASS A CLASS B ---------- ---------- Earnings available for Common Shareholders, after deducting preferred stock dividend requirements and cumulative effect of changes in accounting principles... $ 26 $ 26 Weighted average number of common and common equivalent shares (stock options) outstanding...................... 22,537,539 25,000,000 Earnings per share....................................... $1.13 $1.05
52-WEEK PERIOD ENDED DECEMBER 28, 1991 --------------------- CLASS A CLASS B ---------- ---------- Earnings available for Common Shareholders, after deducting preferred stock dividend requirements......... $ 60 $ 62 Weighted average number of common and common equivalent shares (stock options) outstanding...................... 24,954,495 25,000,000 Earnings per share....................................... $2.40 $2.48
F-25 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 16. STOCK OWNERSHIP PLAN The Montgomery Ward & Co., Incorporated Stock Ownership Plan was adopted effective July 19, 1988. A total of 1,000,000 Class A Common Stock, Series 1, and 5,412,000 shares of Class A Common Stock, Series 2, have been reserved for issuance under the plan. Key associates of Montgomery Ward and its subsidiaries are eligible to participate and may receive awards, purchase rights and options. Awards are grants of shares for no consideration. Options for 1,484,302 and 1,133,265 shares of Class A Common Stock, Series 2 were exercisable at January 1, 1994 and January 2, 1993, respectively. Following is a summary of activity under the plan.
OPTION PRICE OPTIONS RANGE --------- ------------- Outstanding December 29, 1990......................... 2,661,825 $ 0.20-$10.20 --------- Granted, 1991......................................... 818,002 $11.10-$14.79 Exercised, 1991....................................... (73,450) $ 0.20-$14.79 Cancellations, 1991................................... (461,410) $ 0.20-$14.79 --------- Outstanding December 28, 1991......................... 2,944,967 $ 0.20-$14.79 --------- Granted, 1992......................................... 1,377,478 $15.11-$18.75 Exercised, 1992....................................... (256,367) $ 0.20-$15.11 Cancellations, 1992................................... (469,170) $ 0.20-$18.75 --------- Outstanding January 2, 1993........................... 3,596,908 $ 0.20-$18.75 --------- Granted, 1993......................................... 1,979,105 $18.75-$22.50 Exercised, 1993....................................... (192,864) $ 0.20-$18.75 Cancellations, 1993................................... (520,083) $ 0.20-$22.50 --------- Outstanding Janaury 1, 1994........................... 4,863,066 $ 0.20-$22.50 =========
During 1991, the Board of Directors approved the Directors Plan. The Directors Plan was established to, among other things, allow two of the current outside directors to receive all or any portion of the fees for their services as directors of the Company and Montgomery Ward via conversion rights in Series 1 or Series 2 shares. In 1993, 1992 and 1991, 3,466, 3,332 and 3,450 Series 1 shares were issued from treasury as payment for directors fees, respectively. 17. INVESTMENTS IN SUBSIDIARIES FORMERLY UNCONSOLIDATED During 1991, Montgomery Ward Life Insurance Company (MWLIC), formerly a subsidiary of Montgomery Ward Insurance Company (MWIC), became a sister company of MWIC. Under the laws applicable to insurance companies, MWIC and MWLIC are limited in the amount of dividends they may pay without the approval of the Illinois Insurance Department and are prohibited from making any loans and advances to Montgomery Ward and its affiliates. Under these laws, MWIC and MWLIC, which had an accumulated deficit of $9 and retained earnings of $139, respectively, and total shareholder's equity of $12 and $159, respectively, could pay dividends of $2 and $41, respectively, during 1994 subject to the availability of earned surplus as determined on a statutory basis. Dividends received from insurance subsidiaries were $35, $27 and $33 for 1993, 1992 and 1991, respectively. In 1991, dividends were paid which exceeded the limitation as determined on a statutory basis. MWIC obtained approval from the Illinois Insurance Department with respect to these excess dividend payments. F-26 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 17. INVESTMENTS IN SUBSIDIARIES FORMERLY UNCONSOLIDATED (CONTINUED) Summary financial information for all subsidiaries previously accounted for on the equity method is as follows:
1993 1992 ---- ---- Cash and Investments........................................... $293 $274 Receivables.................................................... 156 159 Other Assets................................................... 201 200 Other Liabilities.............................................. (403) (401) ---- ---- Net assets................................................. $247 $232 ==== ==== 1993 1992 1991 ---- ---- ---- Gross revenues................................................. $239 $240 $214 Income before taxes............................................ 79 58 70 Net income..................................................... 50 40 45
18. INTEREST EXPENSE, NET OF INVESTMENT INCOME Net interest expense is as follows:
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JANUARY 1, JANUARY 2, DECEMBER 28, 1994 1993 1991 ------------ ------------ ------------ Interest on short-term borrowings........ $12 $ 4 $-- Interest on long-term debt and obliga- tions under capital leases.............. 24 41 70 Miscellaneous interest, net.............. 8 6 5 Investment income........................ (1) (6) (19) --- --- --- Total interest expense, net of in- vestment income..................... $43 $45 $56 === === ===
Realized capital gains before income tax and changes in unrealized gains (losses) after income tax on fixed maturities, mortgage loans and equity securities are as follows:
FIXED MATURITIES AND MORTGAGE EQUITY LOANS SECURITIES ---------------- ---------- 52-Week Period Ended January 1, 1994 Realized.......................................... $ 1 $-- Unrealized........................................ $ -- $ 3 53-Week Period Ended January 2, 1993 Realized.......................................... $ 1 $-- Unrealized........................................ $ -- $ 3 52-Week Period Ended December 28, 1991 Realized.......................................... $ -- $-- Unrealized........................................ $ (1) $ 3
F-27 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 19. ADVERTISING COSTS Advertising costs charged to income were $434 for 1993, $443 for 1992 and $395 for 1991. 20. LITIGATION AND OTHER PROCEEDINGS MW Holding, Montgomery Ward and its subsidiaries are engaged in various litigation and have a number of unresolved claims. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, management is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to have a material impact on the financial condition and the results of operations of the Company. 21. RELATED PARTY TRANSACTIONS Substantially all shares of Class A Common Stock, except those held by the Chairman and Chief Executive Officer of the Company and a trust established for the benefit of his children, are held by a Voting Trust. A Voting Trustee (currently the Chairman and Chief Executive Officer of the Company) has sole voting power and control of all shares held by the Voting Trust. The Voting Trust will expire June 21, 1998 or upon the occurrence of certain specified events in accordance with the Voting Trust Agreement. The Company engages in various transactions with GE Capital as described in Notes 3 and 14. In October 1991, the Company entered into a joint venture, MW Direct L.P. (MW Direct), formed through a partnership between subsidiaries of Montgomery Ward and subsidiaries of Fingerhut Companies, Inc., a Minneapolis-based specialty catalog marketer. Montgomery Ward made a $5 initial capital contribution in 1992 and additional funding may be required within limitations as set forth in the Partnership Agreement. The cumulative maximum capital contribution is limited to $30 in 1994. In December 1992, Montgomery Ward, through formation of a new subsidiary, became a 33.33% partner in Bernel Partners. The purpose of this partnership is to acquire direct or indirect interests in companies which could, consistent with the Company's retail strategy, supply the Company with merchandise for resale. Montgomery Ward made a capital contribution of $10 on January 13, 1993. Per the terms of the partnership agreement, additional funding is not required, but is permitted at the Company's discretion. Montgomery Ward paid on behalf of those associates and past associates of Montgomery Ward and certain of its subsidiaries who purchased stock in the Company in 1988 (the Management Shareholders), the legal fees and related costs and expenses in connection with the deficiencies in tax assessed by the Internal Revenue Service, and the Tax Court cases which have been filed. Montgomery Ward paid approximately $2 in 1993 and $1 in 1992 for services rendered in connection with the aforementioned matters. In 1992, $1 was paid for such services to a law firm in which a director and a Management Shareholder of the Company is a senior partner. In November 1991, the Board of Directors approved a line of credit program for certain associates, including directors who are associates and executive officers of the Company (Line of Credit Program). Under the Line of Credit Program, the Company arranged with banks (Program Banks) for lines of credit of up to $10 in the aggregate for all participants in the Line of Credit Program. As of January 1, 1994, an aggregate of $4 was available under the Line of Credit Program. Any associate who borrows money from the Program F-28 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 21. RELATED PARTY TRANSACTIONS (CONTINUED) Banks under the Line of Credit Program is required to pledge to such Program Banks as collateral a number of shares owned by such associate, the fair market value of which is equal to twice the amount the associate borrows. In the event any associate should default upon his or her repayment obligations, the Company anticipates that it will repurchase that individual's note from the Program Banks, together with the Banks' security interest in the pledged stock, at the face amount of the note plus up to one year's interest. At January 1, 1994, borrowings of approximately $1 were outstanding under the Line of Credit Program. 22. BUSINESS SEGMENTS Montgomery Ward and its subsidiaries are engaged in retail merchandising and direct response marketing, including insurance, in the United States. Following is information regarding revenues, earnings and assets of the Company by segment.
53-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JANUARY 1, 1994 JANUARY 2, 1993 DECEMBER 28, 1991 --------------- --------------- ----------------- Total Revenues Retail Merchandising...... $5,602 $5,402 $5,294 Direct Response Marketing. 400 379 360 ------ ------ ------ Total................... $6,002 $5,781 $5,654 ====== ====== ====== Operating Earnings Retail Merchandising...... $ 171 $ 198 $ 225 Direct Response Marketing. 54 52 41 Corporate and Other....... (65) (100) (91) ------ ------ ------ Total................... $ 160 $ 150 $ 175 ====== ====== ====== Identifiable Assets Retail Merchandising...... $2,627 $2,391 $2,327 Direct Response Marketing. 753 702 733 Corporate and Other....... 455 392 888 ------ ------ ------ Total................... $3,835 $3,485 $3,948 ====== ====== ====== Depreciation and Amortiza- tion Retail Merchandising...... $ 95 $ 94 $ 93 Direct Response Marketing. 3 3 2 ------ ------ ------ Total................... $ 98 $ 97 $ 95 ====== ====== ====== Capital Expenditures Retail Merchandising...... $ 139 $ 141 $ 126 Direct Response Marketing. 3 5 2 ------ ------ ------ Total................... $ 142 $ 146 $ 128 ====== ====== ======
F-29 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 23. PARENT COMPANY FINANCIAL INFORMATION Following is the MW Holding balance sheet as of January 1, 1994 and January 2, 1993 and the statements of income and cash flows for the 52-week period ended January 1, 1994, for the 53-week period ended January 2, 1993 and for the 52-week period ended December 28, 1991. MONTGOMERY WARD HOLDING CORP. BALANCE SHEET ASSETS
JANUARY 1, JANUARY 2, 1994 1993 ---------- ---------- Federal Income Taxes Receivable........................... $ 4 $ 4 Investment in Montgomery Ward............................. 671 592 Other Assets.............................................. -- 1 ---- ---- Total Assets.............................................. $675 $597 ==== ==== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts Payable to Montgomery Ward....................... $ 35 $ 23 Accrued Liabilities....................................... 33 21 ---- ---- Total Liabilities....................................... 68 44 Common Stock.............................................. -- -- Capital in excess of par value............................ 19 16 Retained Earnings......................................... 658 580 Unrealized gain on marketable equity securities........... 3 3 Less: Treasury stock, at cost............................. (73) (46) ---- ---- Total Shareholders' Equity.............................. 607 553 ---- ---- Total Liabilities and Shareholders' Equity................ $675 $597 ==== ====
STATEMENT OF INCOME
52-WEEK 53-WEEK 52-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED JANUARY 1, 1994 JANUARY 2, 1993 DECEMBER 28, 1991 --------------- --------------- ----------------- Miscellaneous Costs.......... $ (1) $(2) $-- ---- --- ---- Total Costs and Expenses... (1) (2) -- Tax Benefits................. -- -- -- ---- --- ---- Net Loss Before Earnings of Montgomery Ward............. (1) (2) -- Equity in Net Income of Mont- gomery Ward, net of cumulative effect of ac- counting changes............ 102 62 135 ---- --- ---- Net Income................... 101 60 135 Preferred Stock Dividend Re- quirements.................. -- (8) (13) ---- --- ---- Net Income Available for Com- mon Shareholders............ $101 $52 $122 ==== === ====
F-30 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (DOLLAR AMOUNTS IN MILLIONS) 23. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) STATEMENT OF CASH FLOWS
JANUARY 1, JANUARY 2, DECEMBER 28, 1994 1993 1991 ---------- ---------- ------------ Net Income.................................. $ 101 $ 60 $ 135 Adjustments to reconcile net income to net cash provided: Change in undistributed earnings of sub- sidiary.................................. (79) 48 (122) Decrease (increase) in: Federal income taxes receivable......... -- (1) (2) Other assets............................ 1 -- -- Increase (decrease) in: Accounts payable to Montgomery Ward..... 12 10 7 Accrued liabilities..................... (4) (4) (1) ----- ---- ----- Net cash provided before financing activi- ties....................................... 31 113 17 ----- ---- ----- Cash flows from financing activities: Proceeds from issuance of common stock.... 1 1 -- Dividends declared........................ (23) (19) (13) Payments to redeem preferred stock........ -- (90) -- Purchase of treasury stock, at cost....... (11) (7) (7) Tax benefit of stock options exercise and other stock exchanges.................... 2 2 3 ----- ---- ----- Net cash used for financing activities...... (31) (113) (17) ----- ---- ----- Cash at end of period....................... $ -- $-- $ -- ===== ==== ===== Non-cash investing activities: Change in unrealized gain on investments.. $ -- $ 1 $ 2 Non-cash financing activities: Notes issued for purchase of treasury stock.................................... $ 16 $ 5 $ 21
F-31 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 24. QUARTERLY FINANCIAL DATA (UNAUDITED) The quarterly operations of MW Holding as restated (See Notes 6 and 9) are summarized as follows:
QUARTER ----------------------------------- FIRST SECOND THIRD FOURTH YEAR ------ ------ ------ ------ ------ 52-Week Period Ended January 1, 1994 Net sales............................... $1,151 $1,279 $1,321 $1,851 $5,602 Cost of goods sold...................... 867 958 1,002 1,398 4,225 Net Income.............................. 10 27 14 50 101 Net Income per Class A Common Share..... .21 .61 .33 1.16 2.29 Net Income per Class B Common Share..... .19 .56 .29 1.01 2.04 53-Week Period Ended January 2, 1993 Net sales............................... $1,086 $1,202 $1,238 $1,876 $5,402 Cost of goods sold...................... 809 886 928 1,395 4,018 Net Income before cumulative effect of changes in accounting principles....... 8 27 15 50 100 Cumulative effect of changes in account- ing principles......................... (40) -- -- -- (40) Net Income.............................. (32) 27 15 50 60 Net Income per Class A Common Share be- fore cumulative effect of changes in accounting principles.................. .12 .53 .26 1.11 2.01 Cumulative effect of changes in account- ing principles......................... (.86) -- -- -- (.88) Net Income per Class A Common Share..... (.74) .53 .26 1.11 1.13 Net Income per Class B Common Share be- fore cumulative effect of changes in accounting principles.................. .11 .50 .24 1.01 1.87 Cumulative effect of changes in account- ing principles......................... (.82) -- -- -- (.82) Net Income per Class B Common Share..... (.71) .50 .24 1.01 1.05
F-32 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF INCOME (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE 13-WEEK PERIOD ENDED ------------------ APRIL 2, APRIL 3, 1994 1993 -------- -------- (UNAUDITED) Revenues Net sales, including leased and licensed department sales.... $1,211 $1,151 Direct response marketing revenues, including insurance...... 107 97 ------ ------ Total Revenues............................................. 1,318 1,248 ------ ------ Costs and Expenses Cost of goods sold, including net occupancy and buying ex- pense....................................................... 926 868 Benefits, losses and expenses of direct response operations.. 81 73 Operating, selling, general and administrative expenses...... 284 283 Interest expense, net of investment income................... 11 9 ------ ------ Total Costs and Expenses................................... 1,302 1,233 ------ ------ Income Before Income Taxes..................................... 16 15 Income Tax Expense............................................. 6 5 ------ ------ Net Income..................................................... $ 10 $ 10 ====== ====== Net Income per Class A Common Share............................ $ .23 $ .21 Net Income per Class B Common Share............................ $ .20 $ .19
See notes to consolidated condensed financial statements. F-33 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED CONDENSED BALANCE SHEET (MILLIONS OF DOLLARS)
APRIL 2, JANUARY 1, 1994 1994 ASSETS ----------- ---------- (UNAUDITED) Cash and cash equivalents............................... $ 50 $ 98 Short-term investments.................................. 7 19 Investments of insurance operations..................... 326 296 ------ ------ Total Cash and Investments.......................... 383 413 Trade and other accounts receivable..................... 72 62 Accounts and notes receivable from affiliates........... 26 4 ------ ------ Total Receivables................................... 98 66 Merchandise inventories................................. 1,391 1,242 Prepaid pension contribution............................ 313 310 Properties, plants and equipment, net of accumulated de- preciation and amortization............................ 1,315 1,263 Other assets............................................ 667 541 ------ ------ Total Assets............................................ $4,167 $3,835 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings................................... $ 367 $ -- Trade accounts payable.................................. 1,141 1,358 Federal income taxes payable............................ 3 7 Accrued liabilities and other obligations............... 1,195 1,197 Insurance policy claim reserves......................... 237 237 Long-term debt.......................................... 402 213 Obligations under capital leases........................ 87 89 Deferred federal income taxes........................... 109 127 ------ ------ Total Liabilities................................... 3,541 3,228 Shareholders' Equity Common stock.......................................... -- -- Capital in excess of par value........................ 19 19 Retained earnings..................................... 668 658 Unrealized gain on marketable equity securities....... 14 3 Less: Treasury stock, at cost......................... (75) (73) ------ ------ Total Shareholders' Equity.......................... 626 607 ------ ------ Total Liabilities and Shareholders' Equity.............. $4,167 $3,835 ====== ======
See notes to consolidated condensed financial statements. F-34 MONTGOMERY WARD HOLDING CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (MILLIONS OF DOLLARS)
FOR THE 13-WEEK PERIOD ENDED ----------------- APRIL 2, APRIL 3, 1994 1993 -------- -------- (UNAUDITED) Cash flows from operating activities: Net income................................................. $ 10 $ 10 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 25 25 Deferred income taxes.................................... (6) (4) Changes in operating assets and liabilities: (Increase) decrease in: Trade and other accounts receivable.................... 2 (2) Accounts and notes receivable from affiliates.......... (22) (2) Merchandise inventories................................ (6) (133) Prepaid pension contribution........................... (3) (3) Other assets........................................... (11) (15) Increase (decrease) in: Trade accounts payable................................. (286) (174) Federal income taxes payable, net...................... (2) 3 Accrued liabilities and other obligations.............. (65) (55) ------ ------ Net cash used in operations.......................... (364) (350) ------ ------ Cash flows from investing activities: Acquisition of Lechmere, net of cash acquired.............. (109) -- Purchase of short-term investments......................... (25) (19) Purchase of investments of insurance operations............ (116) (98) Sale of short-term investments............................. 37 30 Sale of investments of insurance operations................ 103 87 Capital expenditures....................................... (12) (10) Disposition of properties, plants and equipment, net....... -- 1 ------ ------ Net cash used for investing activities............... (122) (9) ------ ------ Cash flows from financing activities: Proceeds from issuance of short-term borrowings............ 1,727 1,742 Payments on short-term borrowings.......................... (1,360) (1,514) Proceeds from issuance of long-term debt................... 165 100 Payments of Montgomery Ward long-term debt................. (2) (3) Payments of obligations under capital leases............... (2) (1) Payments of Lechmere long-term debt........................ (88) -- Purchase of treasury stock, at cost........................ (2) (1) ------ ------ Net cash provided by financing activities............ 438 323 ------ ------ Decrease in cash and cash equivalents........................ (48) (36) Cash and cash equivalents at beginning of period............. 98 81 ------ ------ Cash and cash equivalents at end of period................... $ 50 $ 45 ====== ====== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes............................................. $ 15 $ 7 Interest................................................. $ 13 $ 9
See notes to consolidated condensed financial statements. F-35 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1. CONDENSED FINANCIAL STATEMENTS Montgomery Ward Holding Corp. (the Company or MW Holding) conducts its operations through its only direct subsidiary, Montgomery Ward & Co., Incorporated (Montgomery Ward). In the opinion of management, the unaudited financial statements of the Company include all adjustments necessary for a fair presentation. All such adjustments are of a normal recurring nature. The condensed financial statements should be read in the context of the financial statements and notes thereto contained elsewhere in this Registration Statement. Income from investments of insurance operations for 1993 has been reclassified from Interest expense, net to Direct response marketing revenues. Certain other prior period amounts have also been reclassified to be comparable with the current period presentation. Effective January 2, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS No. 115). Under FAS No. 115, all debt securities are classified as "available-for-sale" and are stated at fair market value with all changes in unrealized gains or losses included in Shareholders' Equity. The adoption of FAS No. 115 increased investments of insurance operations by $17, deferred income taxes by $6 and unrealized gain on equity securities by $11 and had no impact on the results of operations of the Company. 2. NET INCOME PER COMMON SHARE Net income per common share is computed as follows:
13-WEEK PERIOD ENDED APRIL 4, 1994 --------------------- CLASS A CLASS B ---------- ---------- Earnings available for Common Shareholders......... $ 5 $ 5 Weighted average number of common and common equivalent shares (stock options) outstanding..... 21,632,062 25,000,000 Earnings per share................................. $0.23 $0.20 13-WEEK PERIOD ENDED APRIL 3, 1993 --------------------- CLASS A CLASS B ---------- ---------- Earnings available for Common Shareholders......... $ 5 $ 5 Weighted average number of common and common equivalent shares (stock options) outstanding..... 22,471,520 25,000,000 Earnings per share................................. $0.21 $0.19
3. ACQUISITION OF LECHMERE, INC. Montgomery Ward acquired in a merger transaction all the stock of LMR Acquisition Corporation (LMR) which owns 100% of the stock of Lechmere, Inc. (Lechmere) on March 30, 1994. The aggregate purchase price was comprised of an estimated price of $113 and a contingent purchase price payable in 1995 of up to $20 in cash and the issuance of up to 400,000 shares of Class A Common Stock, Series 1 (or at the option of Montgomery Ward, if duly authorized, up to 400,000 shares of Class A Common Stock, Series 3). The exact amount, if any, of the contingent price to be paid is dependent on Lechmere achieving or exceeding a specified gross margin amount during the period commencing February 27, 1994 and ending February 25, 1995. F-36 MONTGOMERY WARD HOLDING CORP. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONCLUDED) (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 3. ACQUISITION OF LECHMERE, INC. (CONTINUED) The closing price included a $10 promissory note (the Note) of Montgomery Ward, which bears interest at a rate of 4.87% per annum. Seventy-five percent of the accrued interest on and principal of the Note are payable 540 days after the date of the Note and the balance is payable three years after the date of the Note. The Note, which is secured by a standby letter of credit, is to be reduced upon the occurrence of certain specified circumstances. As part of the closing, Montgomery Ward advanced approximately $88 and assumed $3 in obligations to enable Lechmere to retire its outstanding bank debt and subordinated debt. The acquisition was accounted for as a purchase. The purchase price has been allocated to Lechmere's net assets based upon preliminary results of asset valuations and liability and contingency assessments. Actual adjustments may differ based on the results of further evaluations of the fair value of the acquired assets and liabilities. Any differences between preliminary and actual adjustments are not expected to have a material impact on the consolidated financial statements. The preliminary allocation is summarized as follows: Inventory........................................................... $143 Properties, Plants and Equipment.................................... 65 Goodwill............................................................ 108 Other Assets........................................................ 23 Due to Montgomery Ward.............................................. (88) Other Liabilities................................................... (138) ---- $113 ====
4. SUBSEQUENT EVENT On April 27, 1994, the Company issued 750 shares of a new series of Senior Preferred Stock (Senior Preferred Stock) to GE Capital in exchange for $75 in cash. The Company used the proceeds to acquire 750 shares of a new issue of Senior Preferred Stock of Montgomery Ward (Montgomery Ward Preferred) for $75 and Montgomery Ward used the proceeds to reduce short-term borrowings. Holders of the Senior Preferred Stock are entitled to receive cumulative cash dividends of $4,850 per share, per annum, in equal quarterly payments. The Company may, upon 10 days notice, redeem the Senior Preferred Stock at a price of $100,000 per share. On or after April 28, 1999, upon four months written notice by the holders, the Company is required to redeem the Senior Preferred Stock at a price of $100,000 per share. F-37 STOCKHOLDERS' AGREEMENT DATED AS OF JUNE 17, 1988 AS AMENDED AND RESTATED AS OF AUGUST 1, 1994 (INCLUDING AMENDMENTS CONTEMPLATED AS OF AUGUST 1, 1994) TABLE OF CONTENTS
PAGE ---- ARTICLE I Definitions and Introductory Matters................. A-1 1.1 Adoption of Recitals................................. A-1 1.2 Definitions.......................................... A-1 1.3 Securities Law Restrictions.......................... A-10 1.4 Transferability of Certain Shares.................... A-11 Duration of Certain Portions of Article II and 1.5 Certain Portions of Article III...................... A-11 1.6 Duration of Certain Portions of Article V............ A-11 1.7 Withholding.......................................... A-11 1.8 Consummation of Acquisition.......................... A-12 1.9 Joinder in Agreement................................. A-12 1.10 Adjustment for Dilutive Events....................... A-12 1.11 Shortening or Lengthening of Option Periods.......... A-12 1.12 Action by 2/3 of Members of Board of Directors....... A-12 ARTICLE II Voluntary Transfers of Shares........................ A-12 2.1 General Effect of Agreement.......................... A-12 2.2 Certain Permitted Transfers of Shares................ A-13 2.3 Certain Prohibited Transfers......................... A-14 2.4 Notice of Transfer of Shares......................... A-14 2.5 Form of Transfer Notice.............................. A-15 2.6 Approval of Board of Directors....................... A-15 2.7 Options.............................................. A-16 2.8 Transfer if Options Not Exercised.................... A-17 2.9 Exercise of Options for Less than All of the Shares.. A-18 2.10 Closing of Exercise of Options....................... A-18 2.11 Effect of Shares in the Hands of the Transferee...... A-18 2.12 Termination of GE Capital's Rights................... A-19 ARTICLE III Purchases of Shares upon Termination of Employment... A-19 Termination of Employment of Type 2 Management 3.1 Shareholder.......................................... A-19 Death or Permanent Disability of a Type 2 Management 3.2 Shareholder.......................................... A-20 Death of Type 2 Management Shareholder Following 3.3 Termination of Employment............................ A-20 3.4 Notice of Death...................................... A-21 3.5 Termination of Brennan's Employment or Death......... A-21 3.6 Death of Other Type 1 Management Shareholder......... A-22 3.7 Purchase Price of Shares............................. A-22 3.8 Manner of Payment.................................... A-23 3.9 Notes and Security................................... A-24 3.10 Fair Market Value.................................... A-25 3.11 Closing.............................................. A-27 3.12 Priorities........................................... A-27 3.13 Failure to Deliver Shares............................ A-27 3.14 Resale of Shares..................................... A-28 3.15 Modification of Options.............................. A-28 3.16 Offset of Purchase Price............................. A-28
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PAGE ---- ARTICLE IV Certain Limitations on Purchases of Shares........... A-28 4.1 Restrictions on the Company's Right and/or Obligation to Purchase Shares................................... A-28 4.2 Definition of the Limitations........................ A-30 4.3 Cash Payments Limitation............................. A-30 4.4 Right of GE Capital to Cure Limitations.............. A-31 ARTICLE V Corporate Governance Matters......................... A-31 5.1 Voting of Shares held by Management Shareholders..... A-31 5.2 Election of Directors................................ A-31 5.3 Certain Supermajority Requirements................... A-32 5.4 Certain Required Provisions of Certificate of Incorporation........................................ A-34 5.5 By-laws of Members of the Ward Group................. A-35 5.6 Election of Chief Executive Officer.................. A-36 5.7 Agreement to Vote.................................... A-36 5.8 Recapitalization..................................... A-36 ARTICLE VI Registration Rights.................................. A-36 6.1 Demand Registration Rights........................... A-36 6.2 Piggyback Registration Rights........................ A-38 6.3 Registration Procedures.............................. A-39 6.4 Restrictions on Public Sale.......................... A-42 6.5 Other Registrations.................................. A-42 6.6 Registration Expenses................................ A-42 6.7 Indemnity and Contribution........................... A-43 6.8 Rule 144............................................. A-45 6.9 Participation in Underwritten Registrations.......... A-45 6.10 Other Registration Rights............................ A-45 6.11 Amendments and Waivers............................... A-46 6.12 Inclusion of Vested Shares........................... A-46 6.13 Exception............................................ A-46 ARTICLE VII Restrictive Covenants................................ A-46 7.1 Restrictive Covenants................................ A-46 7.2 Limitations on Restrictive Covenants................. A-47 7.3 Return of Documents.................................. A-47 7.4 Cooperation.......................................... A-47 7.5 Enforcement.......................................... A-48 7.6 Survival; Waiver of Offset........................... A-48 7.7 Jurisdiction......................................... A-48 7.8 Construction......................................... A-48 7.9 Exception............................................ A-48 ARTICLE VIII General Matters...................................... A-49 8.1 Legend on Certificates............................... A-49 8.2 Termination and Amendment of Agreement............... A-49 8.3 Termination of Status as Management Shareholder...... A-50
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PAGE ---- 8.4 Not an Employment Agreement............................ A-50 8.5 Indemnification........................................ A-50 8.6 Notices................................................ A-50 8.7 Miscellaneous.......................................... A-51 8.8 Counterparts........................................... A-51 8.9 Descriptive Headings................................... A-51 8.10 Entire Agreement....................................... A-51 8.11 Waivers................................................ A-51 8.12 Binding Effect; Enforcement............................ A-51 8.13 Applicable Law......................................... A-51 8.14 Severability........................................... A-51 8.15 Resolution of Certain Ambiguities and Conflicts........ A-52 8.16 Joinder by Brennan..................................... A-52 8.17 Authority to Give Consents, Approvals, etc............. A-52
iii STOCKHOLDERS' AGREEMENT THIS AGREEMENT ("Agreement") is made as of June 17, 1988 among BFB Acquisition Corp., a Delaware corporation (the "Company"), Bernard F. Brennan ("Brennan"), General Electric Capital Corporation, a New York corporation ("GE Capital") and the other Persons (as herein defined) who are parties to this Agreement. RECITALS A. The Company has been organized for the purpose of acquiring all of the outstanding shares of stock of Montgomery Ward & Co., Incorporated ("Ward"), and, to this end, the Company has entered into a Stock Purchase Agreement, dated as of March 6, 1988, as amended, with Mobil Corporation and Marcor Inc. (the "Purchase Agreement"), and is about to complete the acquisition of Ward pursuant to the provisions thereof. B. Brennan and the other individuals executing this Agreement as of the date hereof have purchased shares of Class A Common Stock, Series 1, of the Company. C. GE Capital has purchased shares of Class B Common Stock and Senior Preferred Stock, par value $1.00 per share (the "Preferred Stock"). D. The parties desire to set forth certain restrictions with respect to the ownership of shares of Class A Common Stock, Series 1 ("Series 1 Shares"), Class A Common Stock, Series 2 ("Series 2 Shares"), and Class A Common Stock, Series 3 ("Series 3 Shares"), of the Company (the Series 1 Shares, Series 2 Shares and Series 3 Shares being hereinafter collectively referred to as "Class A Shares" and the holders thereof being sometimes collectively referred to as "Class A Shareholders") and shares of Class B Common Stock of the Company ("Class B Shares" and the holders thereof being sometimes collectively referred to as "Class B Shareholders"), certain options and obligations to purchase such shares, and certain matters relating to corporate governance of the Company, all as herein set forth. AGREEMENTS NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I Definitions and Introductory Matters 1.1 Adoption of Recitals. The parties hereto adopt the foregoing Recitals and agree and affirm that construction of this Agreement shall be guided thereby. 1.2 Definitions. For the purposes hereof: (a) "Acquisition Date" shall mean the date on which a Management Shareholder (as herein defined) first acquired any Shares (as herein defined). The Acquisition Date for a Permitted Transferee (as herein defined) shall be the same as the Acquisition Date for his Management Shareholder; (b) "Acquisition Price" shall mean the price paid to the Company for a Share purchased from the Company (as adjusted by the Company on an equitable basis for stock dividends, stock splits, reclassifications and like actions); (c) "Act" shall mean the Securities Act of 1933, as amended; (d) "Adjustment Period" shall have the meaning set forth in Section 3.10(a)(ii); (e) "Advice" shall have the meaning set forth in Section 6.3; (f) "Applicable Date" shall have the meaning set forth in Section 3.10(a); (g) "Article III Closing" and "Article III Closing Date" shall have the meanings set forth in Section 3.11; (h) "Average Closing Price" shall have the meaning set forth in Section 3.10(b); (i) "Award" shall mean an award of Shares without cash consideration pursuant to the terms of the Employee Stock Option Plan (as herein defined); (j) Intentionally omitted; (k) "Board of Directors" shall mean the board of directors of the Company; (k)(A) "Brennan" shall mean Bernard F. Brennan; (l) "Cash Payments Limitation" shall have the meaning set forth in Section 4.3; (m)"Cause" shall mean any of the following with respect to an employee of a member of the Ward Group (as herein defined): (i) the commission of any crime, whether or not involving any member of the Ward Group, which constitutes a felony in the jurisdiction involved; (ii) the sale, use or possession on the premises of any member of the Ward Group of a controlled substance whose sale, use or possession is illegal in the manner used or possessed and in the jurisdiction involved; (iii) the repeated consumption of drugs or alcohol that interferes with the employee's ability to discharge his assigned responsibilities; (iv) an intentional violation of the provisions of Section 7.1 of this Agreement; (v) in the case of a Type 2 Management Shareholder, the intentional and repeated failure on the part of the employee to perform such duties as may be delegated to him and which are commensurate with his employment position, and in the case of Brennan, the intentional and repeated refusal, after repeated written notices thereof from the Board of Directors, to perform such duties at the Company's executive offices in Chicago, Illinois as may be delegated to him which are reasonably commensurate with his position as the chief executive officer of the Company; or (vi) the unlawful taking or misappropriation of any property belonging to any member of the Ward Group or in which any member of the Ward Group has an interest; (n) "Class A Amount" shall mean a number of Class A Shares equal to the Series 1 Amount (as herein defined) or, if less, the Outstanding Amount (as herein defined); (o) "Closing Date" shall mean the date on which the closing pursuant to the Purchase Agreement occurred; (p) "Commission" shall mean the Securities and Exchange Commission; (q) "Competing Business" shall mean any person or entity engaged, in any area of the world, directly or indirectly, in any retail merchandising business conducted from multiple retail locations, of a type engaged in by any member of the Ward Group, or any business of the type engaged in by Signature Financial/Marketing, Inc. ("Signature") or any of its subsidiaries (as long as Signature or such subsidiary is a member of the Ward Group), other than the insurance business, as of the time of the complained of act; (r) "Confidential Information" shall mean competitive data, trade secrets or confidential trade information in the possession of the Ward Group which is not generally known to others and the confidentiality of which the Ward Group have taken reasonable steps to protect, but does not include general business knowledge acquired by a Management Shareholder; A-2 (s) Intentionally omitted; (t) "Controlling Shareholder" shall have the meaning set forth in Section 1.5; (u)"Demand" and "Demanding Group" and "Demand Registration" shall have the meanings set forth in Section 6.1; (v)"Designated Management Optionees" shall mean those Management Shareholders, or any member or members of their respective Families (as herein defined), who are designated in writing by the Designator (as herein defined), with concurrent notice to the Company, as having the right to exercise a specifically designated option to purchase a specifically designated number of Shares pursuant to Article II or III. The options so designated may not, in the aggregate, exceed the number of Shares which, at the time of the designation, are subject to purchase pursuant to Article II or Article III, but in making such designation, the Designator may designate alternate Designated Management Optionees who shall have options to purchase Shares if the Persons designated as primary Designated Management Optionees do not exercise the designated options. The Designator may designate a member of the Committee (as herein defined), or a member of the Family of a member of the Committee, as a Designated Management Optionee only as provided elsewhere in this Agreement. Each designation of a Designated Management Optionee shall be made in writing and delivered by the Designator to the Designated Management Optionee and the Company. By written notice delivered to a Designated Management Optionee, with concurrent notice to the Company, the Designator may change or revoke the designation of any Management Shareholder (or member of his Family, as the case may be) as a Designated Management Optionee and/or the designation of the number of Shares to be purchased, at any time prior to exercise of the designated option for any reason or for no reason. In the event one or more Designated Management Optionees are granted an option to purchase Shares pursuant to Article III, and the Shares as to which such option is exercisable are not Vested Shares in the hands of the Management Shareholder (or his Permitted Transferees) whose Shares are subject to purchase or sale under Article III, the Designator may, as part of the designation of the identity of the Designated Management Optionee(s), designate that all or any portion of such Shares shall be Vested Shares in the hands of the Designated Management Optionee(s); (w)"Designator" shall mean the person or the committee of three Management Shareholders, as set forth below and as the case may be, which has, among other powers, the power to designate the Designated Management Optionees. Prior to the occurrence of an Event (as defined below) for all purposes other than designating (and in connection with the designation of) Designated Management Optionees, the Designator shall be Brennan. At all times for purposes of designating (and in connection with the designation of) Designated Management Optionees, and from and after the occurrence of an Event for all purposes (including, without limitation, designating (and in connection with the designation of) Designated Management Optionees), the Designator shall be such committee of three Management Shareholders (the "Committee"). The Committee shall, except as provided below, be comprised of Brennan, Edwin G. Pohlmann ("Pohlmann") and Myron Lieberman ("Lieberman"). Prior to the occurrence of an Event, if any member of the Committee shall resign from the Committee or cease to be A Qualified Management Shareholder (as defined below), then such person shall cease to be a member of the Committee and the remaining members of the Committee shall as soon as practicable appoint a Qualified Management Shareholder as a member of the Committee and thereby fill the vacancy on the Committee so created. From and after the occurrence of an Event, the Committee shall be comprised of Pohlmann, Spencer H. Heine ("Heine") and Lieberman (each of Pohlmann, Heine and Lieberman being a "Continuing Member" and collectively being the "Continuing Members") so long as each is a Qualified Management Shareholder; provided, however, that at any time from and after the occurrence of an Event (i) if one, but only one, Continuing Member has resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee shall be comprised of the two remaining Continuing Members who have not resigned from the Committee and are Qualified Management Shareholders and the Largest Management Shareholder (as defined below) (but the Second Largest Management A-3 Shareholder (as defined below) if the Largest Management Shareholder is one of such remaining Continuing Members, but the Third Largest Management Shareholder (as defined below) if both the Largest Management Shareholder and the Second Largest Management Shareholder are such remaining Continuing Members), (ii) if each of two, but only two, of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee shall be comprised of the remaining Continuing Member who has not resigned from the Committee and is a Qualified Management Shareholder, the Largest Management Shareholder and the Second Largest Management Shareholder (but the Second Largest Management Shareholder and the Third Largest Management Shareholder if the Largest Management Shareholder is such Continuing Member, but the Largest Management Shareholder and the Third Largest Management Shareholder if the Second Largest Management Shareholder is such Continuing Member), and (iii) if each of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee shall be comprised of the Largest Management Shareholder, the Second Largest Management Shareholder and the Third Largest Management Shareholder. In all cases, the Committee shall act by the vote of a majority of its members; provided, however, that neither a member of the Committee nor a member of his Family may be designated as a Designated Management Optionee except upon the affirmative vote of all other members of the Committee. A "Qualified Management Shareholder" is each of Lieberman and any other person who is a Management Shareholder and employed by a member of the Ward Group. A person (including Lieberman) shall cease to be a Qualified Management Shareholder if (i) he ceases to be a Management Shareholder, (ii) he dies, (iii) he is adjudicated incompetent, (iv) in the case of Lieberman, he ceases to be a director of the Company or (v) in the case of any Management Shareholder other than Lieberman, no member of the Ward Group employs such Management Shareholder. An "Event" means that Brennan has resigned from the Committee or ceased to be a Qualified Management Shareholder. The "Largest Management Shareholder" shall be the Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve as a member of the Committee. The "Second Largest Management Shareholder" shall be the Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. The "Third Largest Management Shareholder" shall be the Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of Shares as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. For the purposes of the foregoing provisions of this paragraph (w), a Management Shareholder shall be deemed to own all Shares owned by his Permitted Transferees. In the event that two or more persons own the same number of Shares so that each, in the absence of the other (or others, as the case may be) would be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder (as the case may be), then the remaining member (or members, A-4 as the case may be) of the Committee from time to time shall determine which of such person or persons shall be deemed to be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder, as the case may be. (x)"Employee Stock Option Plan" or "Plan" shall mean a stock option plan for the benefit of the employees, advisors and consultants of the Ward Group and directors of the Company which may be adopted hereafter by the Board of Directors, pursuant to which such employees, advisors, consultants and directors may be granted options to purchase Class A Shares. The Shares issued pursuant to the Employee Stock Option Plan shall, in the case of Shares issued to employees of the Ward Group, be subject to options to purchase such Shares upon termination of employment with the Ward Group, and restrictions on Transfers, which, unless otherwise changed or waived by 2/3 of the members of the Board of Directors, are reasonably similar to those which are set forth in this Agreement; (y)"Escrow Agent" shall have the meaning set forth in Section 3.13; (z)"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended; (aa)"Fair Market Value per Share" shall have the meaning set forth in Section 3.10; (bb) "Family" shall mean a spouse or descendant or ancestor of a Management Shareholder, or a spouse of a descendant or ancestor of a Management Shareholder, or a trustee of a trust or custodian of a custodianship primarily for the benefit of one or more of the foregoing and/or a Management Shareholder; (cc) "First Period" shall have the meaning set forth in Section 2.3(c); (cc)(A) "Fully Diluted Non-Series 3 Outstanding Amount" shall mean the Fully Diluted Outstanding Amount (as herein defined) less the sum of (x) the number of Series 3 Shares outstanding on the date of determination plus (y) the number of Series 3 Shares subject to purchase pursuant to Options (as herein defined) granted under the Employee Stock Option Plan on the date of determination; (cc)(B) "Fully Diluted Outstanding Amount" shall mean the number of Class A Shares of all series which are outstanding on the date of determination plus the number of Class A Shares subject to purchase pursuant to Options granted under the Employee Stock Option Plan on the date of determination; (dd) "GE Capital Affiliate" shall mean any entity which, at the time of the applicable determination, GE Capital controls, which controls GE Capital, or which is under common control with GE Capital, but does not include the Ward Group or any member thereof. For the purposes of the preceding sentence, "control" means the power, direct or indirect, to direct or cause the direction of the management and policies of a Person through voting securities, contract or otherwise. Without limiting the generality of the foregoing, as of the date of this Agreement, Kidder, Peabody Group, Inc. ("Kidder, Peabody") is a GE Capital Affiliate; (ee) "Group" shall have the meaning set forth in Section 6.1(a)(i); (ff) "Indemnitees" shall mean Brennan, Dominic M. Mangone and Edwin G. Pohlmann; (ff)(A) "Insider" shall have the meaning set forth in Section 3.15; (gg) "Insurance Proceeds" shall have the meaning set forth in Section 3.8(a); (hh) "Limitations" shall have the meaning set forth in Section 4.2; (ii) "Management Shareholders" or "Management Shareholder" shall mean a Type 1 Management Shareholder (as herein defined) or a Type 2 Management Shareholder (as herein defined), without distinction: (jj) "Non-Plan Shares" shall mean all shares other than Plan Shares (as herein defined); (jj)(A) "Non-Series 3 Outstanding Amount" shall mean the Outstanding Amount less the number of Series 3 Shares outstanding on the date of determination; A-5 (kk) "Option" shall mean a nonqualified stock option to acquire Shares granted pursuant to the Employee Stock Option Plan; (ll) "Originally Scheduled Article III Closing Date" shall have the meaning set forth in Section 4.1(b); (mm) "Outstanding Amount" shall mean the number of Class A Shares of all series which are outstanding on the date of determination; (nn) "Period" shall have the meaning set forth in Section 2.3(c); (oo) "Permanent Disability" shall mean the total permanent disability of a Management Shareholder who is an employee of the Ward Group, as determined in accordance with the published policies (in effect on the applicable date) of the Ward Group with respect to the determination of total permanent disability; (pp) "Permitted Transferee" shall mean: (i) a Person, other than a Management Shareholder, to whom Shares are Transferred pursuant to and in compliance with the provisions of Section 2.2(b); and (ii) a member of the Family of a Management Shareholder who has either (x) acquired Shares by virtue of having been designated a Designated Management Optionee by the Designator or (y) acquired Shares on or about the date hereof and joined in this Agreement as a Permitted Transferee of said Management Shareholder. Each reference herein to a Permitted Transferee of a particular Management Shareholder shall mean (x) a Permitted Transferee owning Shares which that Management Shareholder was the last Management Shareholder to own, and (y) a member of the Family of that Management Shareholder who has acquired Shares in a manner set forth in (ii) above; (qq) "Person" shall mean any individual, sole proprietorship, partnership, joint venture, unincorporated organization, association, corporation, trust, institution, public benefit corporation, entity or government; (rr) "Piggyback Registration" shall have the meaning set forth in Section 6.2(a); (ss) Intentionally omitted; (tt) "Plan Shares" shall mean any Shares received by the holder thereof (or by a Permitted Transferee (as herein defined) of such holder) pursuant to the Employee Stock Option Plan; (uu) "Pledgee" shall have the meaning set forth in Section 2.2(c); (vv) "Post-Termination Death" shall have the meaning set forth in Section 3.3; (ww) "Public Offering Termination Date" shall mean the date, if any, on which, as a result of the sale or issuance of shares of common stock pursuant to one or more registration statements under the Act (other than pursuant to the Employee Stock Option Plan or pursuant to a registration statement to register shares primarily or exclusively for Transfer (as hereinafter defined) upon exercise of options pursuant to Article III of this Agreement or in connection therewith) and under Rule 144 (as herein defined), 25% or more of the outstanding shares of voting common stock of the Company consist of shares of voting common stock of the Company which have been so issued or sold; (xx) "Purchase Price" shall have the meaning set forth in Section 3.7; (yy) "Purchase Right" shall mean a nonqualified stock option to acquire Shares, identified as such and generally to be exercised during a shorter period of time than an Option granted pursuant to the terms of the Employee Stock Option Plan; (zz) "Registration" and "Registration Statement" shall have the meanings set forth in Section 6.3; (aaa) "Registration Expenses" shall have the meaning set forth in Section 6.6(a); A-6 (bbb) "Rule 144" shall mean Rule 144, as amended, promulgated by the Commission under the Act: (ccc) "Second Period" shall have the meaning set forth in Section 2.3(c); (ddd) "Second Transfer Notice" shall have the meaning set forth in Section 2.8(b); (eee) "Series 1 Amount" shall mean the number twenty-five million (25,000,000); (fff) "Shareholder" shall mean a Management Shareholder, a Permitted Transferee, GE Capital, and a GE Capital Affiliate who is the owner of Shares, and any Person owning Shares who is no longer a GE Capital Affiliate but who was a GE Capital Affiliate at the time such Person first acquired Shares; (ggg) "Shares" shall, except as otherwise specifically provided herein, mean the shares of common stock of the Company, without distinction as to class or series, and shall include certificates of beneficial interest issued by the Voting Trustee (as herein defined), pursuant to the Voting Trust Agreement (as herein defined); provided, however, that (and without implication that a contrary result was intended, but by way of clarification): (i) for the purposes of determining the number of Shares eligible to vote or receive distributions, there shall be no duplication as between Shares held by the Voting Trustee, on the one hand, and certificates of beneficial interest issued by the Voting Trustee, on the other hand; and (ii) where the right to vote Shares or execute consents is granted or required pursuant to the provisions of this Agreement, except as otherwise expressly provided in Section 8.17, the term "Shares" shall not include certificates of beneficial interest issued by the Voting Trustee under the Voting Trust Agreement; and this Agreement shall be interpreted in accordance with the foregoing proviso to the extent the context so requires; provided, further, that for the purposes of this Agreement, a share of common stock of the Company shall cease to be a Share at such time as such Share: (iii) has been effectively registered and disposed of in accordance with the registration statement under the Act covering it; or (iv) has been sold pursuant to Rule 144; and the legend referred to in Section 8.1 has been removed from the certificate representing such Share, even if such share of common stock is subsequently acquired by a Shareholder; and provided, further, that a share of common stock shall cease to be a Share for the purposes of Article II at such time as such Share has been sold in a foreclosure sale by a Person to whom said Shares have been pledged pursuant to Section 3.9, or retained by such Person in lieu of foreclosure of such pledge; (hhh) "Solicitation Period" shall have the meaning set forth in Section 2.8(b); (hhh)(A) "Termination" shall have the meaning set forth in Section 3.15; (hhh)(B) "Terms and Conditions" shall mean those certain Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions agreed to by and between the Company and participants in the Employee Stock Option Plan. (iii) "Third Party Offer" shall mean a bona fide written offer to purchase Shares; (jjj) "Trading Period" shall have the meaning set forth in Section 3.10(b); (kkk) "Transfer" shall mean any transfer, sale, assignment, pledge, encumbrance or other disposition of Shares, or, in the case of the Company, any issuance or sale of Shares, irrespective of whether any of the foregoing are effected voluntarily or involuntarily, by operation of law or otherwise, or whether inter vivos or upon death; A-7 (lll) "Transferee" shall mean a Person who has made a Third Party Offer or to whom a Transfer for no consideration is proposed to be made; (mmm) "Transferor" shall mean a Person who shall propose to Transfer Shares pursuant to Article II; (nnn) "Transfer Notice" shall mean a written notice of a proposed Transfer; (ooo) "Type 1 Management Shareholder" shall mean Brennan, Silas S. Cathcart, Myron Lieberman and any other Person who is designated by the Designator as a Type 1 Management Shareholder and who concurrently herewith or at any time hereafter, in contemplation of that Person's acquisition of Shares, executes a counterpart of, or joins in and agrees to be bound by, this Agreement as a Type 1 Management Shareholder. Other than Brennan and Myron Lieberman, as long as GE Capital and GE Capital Affiliates own, in the aggregate, at least 20% of the Shares which they acquired in June, 1988, no Person shall be designated as a Type 1 Management Shareholder without the prior consent of GE Capital, which consent shall not unreasonably be withheld; (ppp) "Type 2 Management Shareholder" shall mean any person who concurrently herewith or at any time hereafter, in contemplation of that Person's acquisition of Shares, executes a counterpart of, or joins in and agrees to be bound by, this Agreement as a Type 2 Management Shareholder. Unless that Person has been designated by the Designator as, or is already, a Type 1 Management Shareholder, Type 2 Management Shareholders shall include all Persons who acquire Class A Shares pursuant to the exercise of Options granted to them under the Employee Stock Option Plan who are required to join in this Agreement or to hold such Class A Shares subject to the terms of this Agreement; (qqq) Intentionally omitted; (rrr) "Valuation Date" shall mean the date on which the employment of a Type 2 Management Shareholder with the Ward Group terminates for any reason whatsoever, including death or Permanent Disability; (sss) "Vested Shares" shall mean (x) with respect to a Type 1 Management Shareholder and his Permitted Transferees, all Shares owned by them, and (y) with respect to a Type 2 Management Shareholder and his Permitted Transferees, that number of Shares owned by them, as a group, equal to the amount determined, on the date of determination ("Vesting Date"), by adding A. below plus B. below plus C. below plus D. below, and then subtracting E. below, where A., B., C., D. and E. are as follows: A. the aggregate number of Shares theretofore acquired by them as a group (other than from each other) which as to them as a group are Non- Plan Shares and which, at the time of acquisition by any member of the group, were Vested Shares in the hands of the Person who Transferred such Shares to any one of them or were designated, at the time of acquisition of such Shares by the Management Shareholder or his Permitted Transferees, as Vested Shares by the Company or the Designator pursuant to the provisions hereof; B. the number of Non-Plan Shares determined by multiplying the total number of Non-Plan Shares theretofore acquired by them as a group (other than from each other) and not described in subparagraph A. next above by the Percentage of Vesting for Non-Plan Shares in effect on the Vesting Date; C. the number of Plan Shares determined by multiplying the total number of Plan Shares theretofore acquired by them as a group (other than from each other), including the number of Plan Shares Awarded to them or purchased pursuant to the exercise of Purchase Rights, but excluding the number of Plan Shares acquired pursuant to exercise of Options, by the Percentage of Vesting applicable to each of such Plan Shares in effect on the Vesting Date; D. the lesser of (i) the number of Plan Shares determined by multiplying the total number of Plan Shares purchased or subject to purchase by them under outstanding or previously exercised Options (whether or not exercisable) by the Percentage of Vesting applicable to each Plan Share so purchased or subject to purchase pursuant to an Option on the Vesting Date, and (ii) the number of Plan Shares theretofore acquired by them pursuant to exercise of Options; A-8 E. the aggregate number of Vested Shares theretofore disposed of by them, as a group (other than to or among each other). The number of Vested Shares and Shares which are not Vested Shares owned in the aggregate by a Management Shareholder and his Permitted Transferees shall be allocated among them proportionately to the numbers of Shares owned by each of them. In the event of the occurrence of an event which would give rise to options contained in Section 3.2 (whether or not such options are exercised), the Percentage of Vesting shall be 100%. The Percentage of Vesting of a Type 2 Management Shareholder (and his Permitted Transferees) whose employment with the Ward Group has been terminated for Cause shall be 0%. In all other events, as to a Type 2 Management Shareholder and his Permitted Transferees, the Percentage of Vesting for Non-Plan Shares shall be determined as follows:
IF THE VESTING DATE IS THE PERCENTAGE ON OR AFTER THE: AND BEFORE THE: OF VESTING IS: ---------------------- --------------- -------------- Date of this Agreement First anniversary of the 0% Acquisition Date First anniversary of the Second anniversary of the 20% Acquisition Date Acquisition Date Second anniversary of the Third anniversary of the 40% Acquisition Date Acquisition Date Third anniversary of the Fourth anniversary of the 60% Acquisition Date Acquisition Date Fourth anniversary of the Fifth anniversary of the 80% Acquisition Date Acquisition Date Fifth anniversary of the any time thereafter 100% Acquisition Date
In all other cases, as to a Type 2 Management Shareholder and his Permitted Transferees, the Percentage of Vesting for Plan Shares shall be, if the Vesting Date is before the first anniversary of the Vesting Period Commencement Date (as herein defined), 0%; on or after the first anniversary and before the second anniversary of the Vesting Period Commencement Date, 20%; on or after the second anniversary and before the third anniversary of the Vesting Period Commencement Date, 40%; on or after the third anniversary and before the fourth anniversary of the Vesting Period Commencement Date, 60%; on or after the fourth anniversary and before the fifth anniversary of the Vesting Period Commencement Date, 80%; and on or after the fifth anniversary of the Vesting Period Commencement Date, 100%. In the following instances the Vesting Date shall be the following date: (i) in the case of a Transfer of Shares pursuant to Article II (other than Section 2.2(a) or 2.2(i) thereof), the date on which a Transfer Notice is served; (ii) in the case of a Transfer of Shares pursuant to Section 2.2(a), the date of approval of the proposed Transfer by the Board of Directors; (iii) in the case of a sale of Shares under Rule 144 permitted by Section 2.2(i), the date the Management Shareholder or his Permitted Transferee Transferred Shares utilizing Rule 144; (iv) in the case of a purchase of Shares pursuant to Article III, the date of termination of the applicable Type 2 Management Shareholder's employment with the Ward Group for any reason whatsoever; (v) in the case of an exercise of rights under Article VI, the date on which the Management Shareholder or Permitted Transferee makes a Demand or requests inclusion of any of such Shares in a Registration Statement (as the case may be). A-9 Notwithstanding the foregoing provisions of this paragraph (sss): (vi) in the case of a purchase of Shares pursuant to Article III from a Type 2 Management Shareholder whose Percentage of Vesting, in accordance with the foregoing, is less than 100%, the Board of Directors, in its discretion, may increase the Percentage of Vesting as determined in accordance with the foregoing, but not in excess of 100%; (vii) in the case of termination of employment of a Type 2 Management Shareholder with the Ward Group (other than for Cause), where not all Shares owned by that Management Shareholder and his Permitted Transferees were purchased in accordance with Section 3.1, on the Article III Closing Date those Shares not so purchased which were not Vested Shares as of the date of termination of employment shall become Vested Shares for all purposes of this Agreement other than Section 3.3, and for the purposes of Section 3.3 said Shares shall not thereafter become Vested Shares; (viii) in connection with any issuance or sale of Shares by the Company, the Company may designate all or any portion of such Shares as Vested Shares; (ix) at any time and from time to time, after the Closing Date, upon written notice delivered to the Company, the Designator may increase the Percentage of Vesting otherwise applicable to a Type 2 Management Shareholder and his Permitted Transferees, but not in excess of 100%; (x) on the Public Offering Termination Date, except for the purposes of Section 3.3, all Shares which are not then Vested Shares shall become Vested Shares; (ttt) "Vesting Period Commencement Date" shall mean (i) in the case of an Award, the date of the grant of an Award; (ii) in the case of a Purchase Right, the date of exercise of the Purchase Right; (iii) in the case of an Option, the date of grant of the Option; (uuu) "Voting Trust Agreement" shall mean that certain Voting Trust Agreement, dated as of June 20, 1988, among Brennan and the other individuals who are parties thereto (the "June 20, 1988 Voting Trust Agreement") as well as all agreements adopted hereafter which have substantially similar terms to the June 20, 1988 Voting Trust Agreement and to which any Class A Shares are subject; (vvv) "Voting Trustee" shall mean the Person serving as voting trustee under the Voting Trust Agreement; (www) "Ward Group" shall mean the Company and its direct and indirect subsidiaries. 1.3 Securities Law Restrictions. In addition to the restrictions on the Transfer of Shares which are contained in this Agreement, each Shareholder represents and warrants to the Company, and agrees and acknowledges, that: (a) all Shares acquired by or for such Shareholder in transactions which have not been registered pursuant to the Act are being or have been acquired solely for such Shareholder's own account, for investment purposes only and not with a view toward the distribution thereof (within the meaning of the Act), and that, irrespective of any other provisions of this Agreement, any Transfer of such Shares will be made only in compliance with all applicable federal and state securities laws, including, without limitation, the Act; (b) except to the extent so registered or as provided in Article VI hereof, the Company is not required to register any Shares acquired by or for such Shareholder under the Act, and such Shares must be held by such Shareholder until such Shares are registered under the Act or an exemption from such registration is available; that the Company will have no obligation to take any actions that may be necessary to make available any exemption from registration under the Act; and that the Company will place "stop transfer" restrictions on the party responsible for recording Transfers of Shares; (c) the Shareholder is familiar with Rule 144, which establishes guidelines governing, among other things, the resale of "restricted securities" (that is, securities which are acquired from the issuer of such securities in a transaction not involving any public offering); A-10 (d) Rule 144 may not be available for Transfers of the Shares, because, among other things, the Company, at the time of the proposed Transfer of Shares, may not be required to file the reports required to be filed by Section 15(d) of the Exchange Act and may not then have a class of securities registered pursuant to Section 12 of the Exchange Act; and, even if the Company is then required to file reports under the Exchange Act, and has filed all reports required to be filed, reliance on Rule 144 to Transfer securities is subject to other restrictions and limitations, as set forth in Rule 144; (e) in connection with any Transfer of the Shares, under Rule 144 or pursuant to some other exemption, the Shareholder may, if required by the Company, be required to deliver to the Company an opinion from counsel for the Shareholder, and/or receive an opinion from counsel for the Company, to the effect that all applicable federal and state securities law requirements have been met. 1.4 Transferability of Certain Shares. Shares issued by the Company pursuant to a stock dividend, stock split, reclassification, or like action, or pursuant to the exercise of a right granted by the Company to all its stockholders to purchase Shares on a proportionate basis, shall be Transferred only, and for all purposes be treated, in the same manner as, and be subject to the same options with respect to, the Shares which were split or reclassified or with respect to which a stock dividend was paid or rights to purchase Shares on a proportionate basis were granted. In the event of a merger of the Company where this Agreement does not terminate pursuant to Section 8.2(c), shares of stock and/or securities convertible into shares of stock issued in exchange for Shares shall thereafter be deemed to be Shares which are subject to the terms of this Agreement. 1.5 Duration of Certain Portions of Article II and Certain Portions of Article III. From and after the Public Offering Termination Date: (a) the provisions of Article II shall cease to be in effect as to any Shareholder other than a Controlling Shareholder; provided, however, that from and after the Public Offering Termination Date, the Designator may waive the application of the provisions of Article II as to any particular Transfer by a Controlling Shareholder (including a Transfer by the Designator himself) or terminate the provisions of Article II as to all Controlling Shareholders; provided, further, that as long as GE Capital and the GE Capital Affiliates own, in the aggregate, 10% or more of the outstanding shares of common stock of the Company and Brennan is a Controlling Shareholder, the consent of GE Capital shall be required as to any waiver or termination of the provisions of Article II with respect to a Transfer by Brennan or any of his Permitted Transferees. For the purposes hereof, a Controlling Shareholder shall be a Shareholder who owns (or whose voting trust certificates represent) 1% or more of the outstanding shares of common stock of the Company. For the purpose of the preceding sentence, there shall be full attribution of ownership between a Management Shareholder and his Permitted Transferees, and between GE Capital and the GE Capital Affiliates; (b) the provisions of Section 3.2(a) and Sections 3.5 and 3.6, shall terminate, and all references in Sections 3.2(b) and (c) to the 90-day period referred to in Section 3.2(a) shall be eliminated from said sections. 1.6 Duration of Certain Portions of Article V. Anything in this Agreement to the contrary notwithstanding, (a) the provisions of Article V of this Agreement, to the extent they constitute an agreement with respect to the manner in which Shares shall be voted, and, (b) unless sooner terminated pursuant to other provisions of this Agreement, Section 5.3, shall be in effect only until the tenth anniversary of the date of this Agreement. 1.7 Withholding. Each Management Shareholder shall pay, or make arrangements to pay, all federal, state and local income taxes which may be assessed upon such Management Shareholder in connection with his ownership of Shares, including, without limitation, taxes which may be imposed in connection with the lapse or release of any restrictions set forth herein with respect to the Shares. In any case in which any member of the Ward Group is legally required to withhold such taxes, such payment shall be made on or before the date such withholding is required. In the event any such payment is not made when A-11 due and any member of the Ward Group is legally required to withhold such taxes, then, to the extent permitted by law, the Company shall have the right to do any of the following in its sole discretion: (i) direct the Voting Trustee to sell such number of Shares subject to the Voting Trust Agreement which are beneficially owned by the Management Shareholder as may be necessary in order that the net proceeds of sale will equal the member of the Ward Group's withholding obligation (with such Shares remaining subject to the Voting Trust Agreement), and pay such net proceeds to such member of the Ward Group; (ii) deduct the amount required to be withheld from funds otherwise due the Management Shareholder by the Ward Group (including, without limitation, salaries and proceeds of the sale of Shares sold to the Company pursuant to the provisions of this Agreement), and pay the amount so deducted to such member of the Ward Group; or (iii) pursue any other legal or equitable right or remedy. 1.8 Consummation of Acquisition. The Company will use its best efforts to consummate the acquisition contemplated by the Purchase Agreement. If, however, such acquisition is not consummated, then this Agreement shall terminate and the parties hereto shall be placed in the position in which they would have been if this Agreement had not been entered into. 1.9 Joinder in Agreement. Except as contemplated by this Agreement, Shares shall not be Transferred to any Person who is not a signatory to this Agreement unless that Person shall have executed and delivered such documents as are deemed reasonably necessary by the Company, in consultation with its counsel, to evidence such Person's acceptance of, and agreement to be bound by, the provisions of this Agreement. Without limiting the generality of the foregoing, such documents shall contain the representations, warranties and covenants set forth in Section 1.3 hereof. 1.10 Adjustment for Dilutive Events. Whenever this Agreement contains a reference to a percentage of the number of Shares acquired by a Shareholder on or about the date hereof, on a specific date, during a specific time period or on "the date the Shareholder first acquired Shares," the number of Shares to which such percentage shall be applied shall be adjusted to take into account stock splits, stock dividends, reverse stock splits and similar dilutive events. 1.11 Shortening or Lengthening of Option Periods. Whenever in Article II or Article III the Company, a Designated Management Optionee or a Shareholder is given an option to purchase or sell Shares which is exercisable during a given period of time, if the Company, that Designated Management Optionee or that Shareholder chooses not to exercise that option, the Company, that Designated Management Optionee or that Shareholder may deliver written notice of that fact to the Company (in the case where a Designated Management Optionee or a Shareholder is relinquishing an option) and the Designator. In such event, the applicable option period shall be deemed to have ended with respect to the Company or such Designated Management Optionee or such Shareholder (as the case may be) on the date on which such notice is delivered. Any period during which an option to purchase is exercisable may be extended by agreement of the party subject thereto. In such event, options to purchase which are subsequent to the option with respect to which the period is extended shall become exercisable on the date upon which they would have been exercisable, unless otherwise agreed by the holders of such options, and shall be extended to the same extent as that the prior options are extended from time to time. 1.12 Action by 2/3 of Members of Board of Directors. Whenever in this Agreement the vote, consent or waiver of 2/3 of the members of the Board of Directors is required, the number of directors required shall be determined without regard to any vacancies on the Board of Directors. ARTICLE II Voluntary Transfers of Shares 2.1 General Effect of Agreement. Unless a Transfer of Shares is made in accordance with the provisions of this Agreement, it shall not be valid or have any force or effect. A-12 2.2 Certain Permitted Transfers of Shares. Anything contained in this Agreement to the contrary notwithstanding, Shares may be Transferred: (a) subject to Section 5.3(p), by a holder of Shares with the prior approval of the Board of Directors, either subject to this Agreement or otherwise, as the Board of Directors shall determine; (b) (i) by a Management Shareholder to any member of his Family; (ii) by a member of the Family of a Management Shareholder to any other member of the Family of that Management Shareholder, or to that Management Shareholder; (iii) to the personal representative of a Management Shareholder or Permitted Transferee who is deceased or adjudicated incompetent; (iv) subject to the provisions of Section 3.2, 3.3 or 3.5 (as the case may be), by the personal representative of a Management Shareholder or Permitted Transferee who is deceased or adjudicated incompetent to any member of said Management Shareholder's Family; (v) upon termination of a trust or custodianship which is a Permitted Transferee, by the trustee of such trust or custodian of such custodianship to the person or persons who, in accordance with the provisions of said trust or custodianship, are entitled to receive the Shares held in trust or custody; (c) by a Management Shareholder to a bank or other institutional lender (a "Pledgee"), as collateral security for a loan to the Management Shareholder to solely finance the acquisition of such Shares; provided, however, that in connection with the exercise of any rights under such pledge, including without limitation any foreclosure thereof, the Pledgee shall be obligated to comply with Sections 2.4 through 2.10, both inclusive (it being understood that following the pledge of Shares to a Pledgee, the character of such Shares as Vested Shares or otherwise shall be determined as if such pledge had not occurred, and, for the purposes of Section 1.2(kkk), a Transfer of such Shares by the Pledgee (other than to the pledgor) shall be deemed to be a Transfer of such Shares by the pledgor); (d) by the Voting Trustee (i) pursuant to clause (i) of Section 1.7, or (ii) to the applicable Management Shareholders and Permitted Transferees who are beneficiaries under the Voting Trust Agreement, upon the termination of the Voting Trust Agreement or the release of said Shares therefrom; (e) pursuant to Articles III or VI; (f) by Brennan or his personal representative (as the case may be) to any Management Shareholder, and by any Management Shareholder or Permitted Transferee to Brennan; (g) by GE Capital to any GE Capital Affiliate, and by any GE Capital Affiliate to any other GE Capital Affiliate or to GE Capital; provided, however, that if GE Capital or such GE Capital Affiliate shall Transfer Shares to a GE Capital Affiliate formed for the principal purpose of owning such Shares, or whose principal asset consists of such Shares (whether at the time of the Transfer of the Shares to such entity or at the time of a subsequent transfer of the shares or other ownership interests of such entity), a subsequent transfer of the shares (or other ownership interest) of such entity shall be deemed to constitute a Transfer of Shares for the purposes of this Agreement; (h) by the Company, either subject to this Agreement or otherwise, as the Board of Directors shall determine, pursuant to (x) Section 5.3(f), or (y) the Employee Stock Option Plan; (i) provided that such Shares are not subject to the Voting Trust Agreement, and provided that Section 2.3 has been complied with as if the Transfer was being made pursuant to Sections 2.4 through 2.10, both inclusive, and, (x) for affiliates (within the meaning of the Act) of the Company and (y) for non-affiliates of the Company if there was not an effective registration statement under the Act covering the sale of Shares to the Management Shareholder making such Transfer, pursuant to Rule 144; (j) by a Person to whom such Shares have been pledged pursuant to Section 3.9, in connection with the exercise of that Person's rights under such pledge, including, without limitation, any foreclosure thereof. A-13 (k) by a Management Shareholder to a Pledgee, as collateral security for a loan to the Management Shareholder pursuant to the line of credit program established with certain banks under which loans are available to certain associates of the Company, which loans are to be secured by an amount of such associate's Shares (the "Line of Credit Program") and by the Pledgee to the Company or any other member of the Ward Group pursuant to such Line of Credit Program; provided, however, that in connection with the exercise of any rights under such pledge (other than a transfer to the Company or any other member of the Ward Group), including, without limitation, any foreclosure thereof, the Pledgee (other than the Company as assignee of or successor to the rights of a Pledgee) shall be obligated to comply with Sections 2.4 through 2.10, both inclusive (it being understood that following the pledge of Shares to a Pledgee, the character of such Shares as Vested Shares or otherwise shall be determined as if such pledge had not occurred, and for the purposes of Section 1.2 (kkk), a Transfer of such Shares by the Pledgee (other than to the pledgor or the Company or any other member of the Ward Group pursuant to such Program) shall be deemed to be a Transfer of such Shares by the pledgor); provided further that, except as otherwise provided in this subparagraph (k), the Shares subject to such pledge shall remain in all respects subject to the terms and provisions of this Agreement, including, without limitation, the put and call rights set forth in Article III of this Agreement and the rights of refusal set forth in Article II of this Agreement. The Company may resell to any person any Shares which the Company has acquired as Pledgee or otherwise pursuant to the Line of Credit Program, on such terms as the Board of Directors shall determine, and such sale shall not be subject to any of the restrictions or rights of first refusal set forth in Article II of this Agreement. Regardless of the party to whom a Transfer of Shares is made pursuant to this Section 2.2, the Shares so Transferred shall thereafter continue to be subject to the terms, provisions and conditions of this Agreement; provided, however, that (x) unless the Board of Directors has determined otherwise, Shares Transferred pursuant to paragraphs (a) or (h) hereof, and (y) Shares Transferred pursuant to paragraphs (i) or (j) hereof or Article VI, shall not be subject to the terms, provisions and conditions of this Agreement. 2.3 Certain Prohibited Transfers. Without the prior written approval of the Board of Directors, the following Transfers of Shares pursuant to Sections 2.4 through 2.10, both inclusive, are prohibited: (a) no Management Shareholder or Permitted Transferee may Transfer Shares prior to the first to occur of (x) the third anniversary of the Acquisition Date and (y) the Public Offering Termination Date; (b) no Management Shareholder or Permitted Transferee may transfer Shares which are not Vested Shares or which are pledged to a Pledgee pursuant to the Line of Credit Program; (c) during the 12 month period ("First Period") beginning on the first to occur of the third anniversary of the Acquisition Date and the Public Offering Termination Date, and during the 12 month period immediately following the First Period (the "Second Period", the First Period and the Second Period being referred to generally as a "Period"), neither a Management Shareholder nor any of his Permitted Transferees may Transfer Shares pursuant to Sections 2.4 through 2.10, both inclusive, to the extent such Transfer would result in the Transfer of more than 33 1/3% for the First Period and 50% for the Second Period of the Vested Shares collectively owned by the Management Shareholder and all of his Permitted Transferees at the beginning of the applicable Period; (d) no Transferor (other than GE Capital, a present or former GE Capital Affiliate or a Pledgee) may Transfer Shares unless that Shareholder has received a Third Party Offer; and (e) neither GE Capital nor any present or former GE Capital Affiliate may, other than a Second Transfer Notice as contemplated by Section 2.8(b), serve a Transfer Notice prior to the expiration of 150 days following the date of expiration of the last option period which arose by virtue of the prior service by GE Capital or a present or former GE Capital Affiliate of a Transfer Notice. 2.4 Notice of Transfer of Shares. Even though the requirements of Section 2.3 shall have been met, no Shares shall be Transferred, except as may be required by or permitted pursuant to the provisions of Section A-14 2.2, Article III, Article IV or Article VI, unless the Transferor first serves a Transfer Notice upon the Company, the Designator and GE Capital, and thereafter complies with the remaining provisions of this Article II. 2.5 Form of Transfer Notice. Each Transfer Notice shall specify: (a) the number of Shares which the Transferor proposes to Transfer and the consideration per Share which the Transferor desires to receive for said Transfer (which, in the case where the Transferor has received a Third Party Offer, shall be the consideration set forth in the Third Party Offer and which, in the case where a Pledgee is foreclosing a pledge of Shares pledged by a Type 2 Management Shareholder, shall not exceed the amount for which the Shares could be purchased pursuant to Section 3.1 if the Management Shareholder who had pledged the Shares to the Pledgee had ceased to be an employee of the Ward Group on the date of service of the Transfer Notice); (b) in any case in which the Transferor has received a Third Party Offer, the name, and business and residence addresses of the Transferee; (c) all of the material terms and conditions, including the terms and conditions of payment, upon which the Transferor proposes to Transfer said Shares (which, in the case where the Transferor has received a Third Party Offer, shall be the terms and conditions set forth in the Third Party Offer); and (d) the address of the Transferor to which notices of the exercise of the options herein provided shall be sent. In any case in which the Transferor is required, pursuant to the provisions hereof, to obtain a Third Party Offer, the Transferor shall attach to the Transfer Notice a true and correct copy of the Third Party Offer. A proposed Transfer of Shares without consideration shall be deemed to be a proposed Transfer for a consideration of $.01 per Share (which shall be deemed to be the consideration per Share set forth in the Transfer Notice). In the event GE Capital or a present or former GE Capital Affiliate serves a Transfer Notice, the Transfer Notice shall, at the option of the Transferor, contain the identities of all Persons with whom the Transferor has had discussions regarding possible Transfers of Shares, and the identities of all Persons with whom the Transferor intends in good faith to have such discussions. During the time between the date on which GE Capital or a present or former GE Capital Affiliate serves a Transfer Notice, and the last date on which an option to purchase the Shares sought to be Transferred is exercisable as provided in Section 2.7, the Transferor shall (if it has elected to include the information set forth in the preceding sentence in its Transfer Notice), by written notice to the Company and the Designator, update the information contained in the Transfer Notice not less frequently than monthly. During the 60-day period commencing on the date of service of a Transfer Notice filed by GE Capital or a present or former GE Capital Affiliate, the Transferor may, by written notice to the Company and the Designator, amend the Transfer Notice to add the identities of additional Persons with whom the Transferor has had discussions or intends in good faith to have discussions regarding Transfers of the Shares sought to be Transferred, but if such a written notice is served, the period of time in which the options set forth in Section 2.7(c) may be exercised by the Designated Management Optionees shall be extended by 60 days from the date on which the last such written notice was served. 2.6 Approval of Board of Directors. The options set forth in Section 2.7 or 2.8 shall be exercisable, and a Transfer of Shares to a Transferee can be made, only if the Board of Directors (and, in the case of a proposed transfer by Kidder, Peabody to any person, other than a Management Shareholder, GE Capital or another GE Capital Affiliate, the Designator) within the 10-day period next following the date of service of the Transfer Notice (or, in the case of a Transfer pursuant to Section 2.8(b), the Second Transfer Notice), shall approve the Transferee as a prospective holder of Shares; provided, however, that the approval by the Board of Directors (and, to the extent required by the foregoing, the Designator) of a Transfer of Shares by GE A-15 Capital or a present or former GE Capital Affiliate shall not be required with respect to any Transfer Notice served by any of them after the fifth anniversary of the Closing Date, as long as the Transferee is not engaged in a Competing Business at the time of service of the Transfer Notice. In any case where approval by the Board of Directors (and, to the extent required by the foregoing, the Designator) for a proposed Transfer is required, subject to the following sentence, the Board of Directors (and, to the extent required by the foregoing, the Designator) shall not unreasonably withhold their approval of any Transferee, and shall not withhold their approval if the Transferee is then a Management Shareholder, GE Capital or a GE Capital Affiliate. However, the Board of Directors (and, in the case of a proposed transfer by Kidder, Peabody to any Person, other than a Management Shareholder, GE Capital or another GE Capital Affiliate, the Designator) may, in its sole discretion, withhold its or his approval of any Transferee which is then engaged in a Competing Business. The Board of Directors (and, in the case of a proposed transfer by Kidder, Peabody to any person, other than a Management Shareholder, GE Capital or another GE Capital Affiliate, the Designator) shall be conclusively deemed to have approved the Transferee unless, prior to the expiration of the 10-day period, it or he shall notify the Transferor in writing of its or his disapproval. For the purposes of this Section 2.6 only, a business which is competitive with the business conducted by Signature and its subsidiaries shall not be deemed to constitute a Competing Business solely by virtue of the fact that its business is competitive with that conducted by Signature and its subsidiaries. 2.7 Options. Upon the service of a Transfer Notice, and provided that the Transferee has been approved by the Board of Directors as set forth in Section 2.6, options to purchase the Shares described therein shall be created, and may be exercised, as follows: (a) the service of a Transfer Notice by a Management Shareholder shall create: (i) options in each of the Designated Management Optionees (exercisable by service of written notice upon the Transferor, the Designator, GE Capital and the Company within the 45-day period next following the date of service of the Transfer Notice) to purchase all or any portion of the Shares described in the Transfer Notice, at the price and on the terms therein contained; (ii) an option in the Company (exercisable by service of written notice upon the Transferor, the Designator and GE Capital within the 15-day period next following the date of expiration of the 45-day period described in subparagraph (i) of this paragraph (a)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees, at the price and on the terms contained in the Transfer Notice; and (iii) an option in GE Capital (exercisable by service of written notice upon the Transferor, the Designator and the Company within the 15-day period next following the date of expiration of the 15-day period described in subparagraph (ii) of this paragraph (a)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees and the Company, at the price and on the terms contained in the Transfer Notice; (b) the service of a Transfer Notice by a Permitted Transferee shall create an option in his Management Shareholder (exercisable by service of written notice upon the Transferor, the Designator, the Company and GE Capital within the 30-day period next following the date of service of the Transfer Notice) to purchase all or any portion of the Shares described therein, at the price and on the terms therein contained. If said Management Shareholder does not exercise the foregoing option with respect to all Shares described in the Transfer Notice, the optionees described in paragraph (a) above shall have the options to purchase the Shares with respect to which said Management Shareholder has not exercised his foregoing option that would have been created if said Management Shareholder had been the Transferor and if the Transfer Notice had been served on the last day of the 30-day period during which said Management Shareholder could have exercised his option pursuant to this paragraph (b); A-16 (c) the service of a Transfer Notice by GE Capital, a present or former GE Capital Affiliate, or a Pledgee shall create: (i) options in each of (x) the Designated Management Optionees and/or (y) in the case of a Transfer Notice served by GE Capital or a GE Capital Affiliate, any other Person designated by the Designator (exercisable by service of written notice upon the Transferor, the Designator and the Company within the 60-day period next following the date of service of the Transfer Notice) to purchase all or any portion of the Shares described in the Transfer Notice, at the price and on the terms therein contained (it being understood that in the event a Person referred to in clause (y), next above, acquires any Shares pursuant to the option granted to such Person, pursuant to this subparagraph (i), such Shares shall, following the acquisition thereof, be subject to such rights, options and restrictions, whether pursuant to this Agreement, or otherwise, as shall be agreed upon by the Designator and such Person) and if so agreed upon by the Designator and such Person, such Person, notwithstanding anything to the contrary elsewhere herein contained, shall not be required to join in and become a party to this Agreement; (ii) an option in the Company (exercisable by service of written notice upon the Transferor and the Designator within the 15-day period next following the date of expiration of the 60-day period described in subparagraph (i) of this paragraph (c)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees, at the price and on the terms contained in the Transfer Notice; and (iii) if the Transferor is a former GE Capital Affiliate or a Pledgee, an option in GE Capital (exercisable by service of written notice upon the Transferor and the Designator within the 15-day period next following the date of expiration of the 15-day period described in subparagraph (ii) of this paragraph (c)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees and the Company, at the price and on the terms contained in the Transfer Notice. If the consideration desired to be received for a Transfer of Shares, as set forth in the Transfer Notice, is other than cash to be paid at the consummation of the Transfer or thereafter (that is, if the consideration would constitute so-called "in kind" property), then any optionee exercising its option under this Agreement to purchase Shares may satisfy its payment obligations with respect to such purchase by making cash payment(s) (in lieu of "in kind" transfer(s) of property) equal to the fair market value of the property which would have been transferred in kind. The determination of such fair market value shall be made, as of the time the Transfer Notice with respect to the Transfer was served, by (x) not less than 2/3 of the members of the Board of Directors in the good-faith exercise of their reasonable discretion, or (y) a nationally recognized investment banking firm retained by the Board of Directors. If the Transferor is a member of the Board of Directors, or, in the case of a Transfer of Shares by GE Capital or present or former GE Capital Affiliates, employees of GE Capital or present or former GE Capital Affiliates are members of the Board of Directors, he or they (as the case may be) shall not vote on the issue of whether the Company shall exercise its option to purchase the Transferor's Shares. 2.8 Transfer if Options Not Exercised. If none of the options provided in Section 2.7 are exercised, or if such options are exercised only in part, or if such options are treated, pursuant to Section 2.9, as if not exercised: (a) if the Transferor is a party other than GE Capital, a present or former GE Capital Affiliate or a Pledgee, then, during a period of 60 days beginning on the day following the date of expiration of the last applicable option period, the Transferor may Transfer all, but not less than all, Shares sought to be Transferred as to which such options were not exercised (or treated, pursuant to Section 2.9, as if not exercised), to the Transferee, at a price which is not less than 95% of the price specified in the Transfer Notice and on terms and conditions not less favorable to the Transferor than those specified in the Transfer Notice; A-17 (b) if GE Capital, a present or former GE Capital Affiliate or a Pledgee is the Transferor, then, during a period of 60 days beginning on the day following the date of expiration of the last applicable option period (the "Solicitation Period"), the Transferor may solicit Third Party Offers to purchase all, but not less than all, Shares sought to be Transferred as to which such options were not exercised (or treated, pursuant to Section 2.9, as if not exercised), and on terms and conditions (other than price) not less favorable to the Transferor than the terms and conditions specified in the Transfer Notice, and at a price which is not less than 95% of the price set forth in the Transfer Notice. If any such Third Party Offer is obtained during the Solicitation Period, then, subject to the following sentence, during a period of 60 days beginning on the date the Third Party Offer was obtained, the Transferor may Transfer all, but not less than all, of the Shares described in the Transfer Notice at the price, and on the terms and conditions, set forth in the preceding sentence. Notwithstanding the preceding sentence, if prior to the end of the Solicitation Period the Transferor shall obtain a Third Party Offer to purchase the Shares, and if in the case of a proposed Transfer by GE Capital or a present or former GE Capital Affiliate the Transferee was not identified in the Transfer Notice (as amended) as a potential Transferee, the Transferor shall serve a new Transfer Notice ("Second Transfer Notice") upon the Company and the Designator, containing the terms of the Third Party Offer, and the Transferor shall attach a copy of the Third Party Offer to the Second Transfer Notice; provided, however, that the Second Transfer Notice may not be served prior to the expiration of 15 days after the date of commencement of said 60-day period. Upon the service of a Second Transfer Notice, the options set forth in Section 2.7(c) may once again be exercised, at the price and on the terms contained in the Second Transfer Notice, except that (x) the period of time in which the Designated Management Optionees may exercise the options set forth in Section 2.7(c) shall be 30 days rather than 60 days (and the 60-day period referred to in Section 2.7(c) (ii) shall be such 30-day period), (y) the period of time in which the Company may exercise the option set forth in Section 2.7(c) shall be 5 days (and the 15-day period referred to in Section 2.7(c)(iii) shall be such 5-day period), and (z) in the case of a Transfer of Shares by a Pledgee or a former GE Capital Affiliate, the period of time in which GE Capital may exercise the option set forth in Section 2.7(c) shall be 5 days (and the 15-day periods described in Sections 2.7(c)(ii) and (iii) shall both be 5 days). If said options are not exercised, or are treated pursuant to Section 2.9 as if not exercised, and provided that the Board of Directors shall have approved the Transferee as provided in Section 2.6, then, during a period of 60 days beginning on the day following the date of expiration of the last applicable option period, the Transferor may Transfer all, but not less than all, Shares sought to be Transferred to the Transferee, at the price specified in the Second Transfer Notice and on terms and conditions not less favorable to the Transferor than those specified in the Second Transfer Notice. In the event said Shares are not so Transferred, they shall remain subject in all respects to the terms of this Agreement and may not thereafter be Transferred except in compliance with all terms, conditions and provisions of this Agreement. 2.9 Exercise of Options for Less than All of the Shares. If options exercised pursuant to Section 2.7 or 2.8(b) call for the purchase of less than all of the Shares sought to be Transferred, then, at the election of the Transferor (exercised by the service of written notice of such election upon the Company and each Shareholder exercising an option to purchase Shares within 10 days next following the expiration of the last period in which such options may be exercised), the exercise of all or any such options shall be deemed null and void and treated, for purposes hereof, as if said options had not been exercised. 2.10 Closing of Exercise of Options. To the extent Shares are to be purchased by Designated Management Optionees, the Company or GE Capital by reason of their exercises of options under Section 2.7 or 2.8(b), the closing of all such purchases shall take place, at the principal offices of the Company, on the 30th day next following the date on which the last applicable option period expired. 2.11 Effect of Shares in the Hands of the Transferee. Shares which are Transferred to a Transferee shall thereafter continue to be subject to all restrictions on Transfer and all other agreements, provisions, A-18 terms and conditions which are contained in this Agreement, and, without limiting the generality of the foregoing, the Transferee must comply: (a) with the provisions of Sections 2.4 through 2.10, both inclusive, if he shall desire to Transfer any such Shares, as if the Transferee was a Management Shareholder; and (b) with the voting agreement provisions of Article V, as if the Transferee was a Shareholder. Except as provided in the following sentence, the Transferee (if he is not a Shareholder) shall not have any of the rights which are given to the Shareholders pursuant to the provisions of this Agreement. However, if the Transferee acquired Shares from GE Capital or a present or former GE Capital Affiliate, the Transferee shall be entitled to the rights granted to GE Capital and the present or former GE Capital Affiliates under Article VI with respect to the Shares acquired by the Transferee. 2.12 Termination of GE Capital's Rights. From and after the date that GE Capital and the GE Capital Affiliates cease to own, in the aggregate, at least 20% of the Shares which GE Capital and the GE Capital Affiliates have purchased or are purchasing on or about the date in June, 1988, all rights of GE Capital under Sections 2.7(a)(iii), (b) and (c)(iii) and Section 2.8(b) of this Article II shall terminate. ARTICLE III Purchases of Shares upon Termination of Employment 3.1 Termination of Employment of Type 2 Management Shareholder. Upon the termination of a Type 2 Management Shareholder's employment with the Ward Group for any reason other than death or Permanent Disability (including, without limitation, resignation or discharge for or without Cause), the Company shall forthwith notify the Designator of such termination, and: (a) each of the Designated Management Optionees shall have an option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees, and the Designator, within the 45-day period next following the date on which the Company has notified the Designator that such Management Shareholder's employment has terminated), to purchase all or any portion of the Shares owned by such Management Shareholder and each of his Permitted Transferees; and (b) the Company shall have an option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees, and the Designator, within the 30-day period next following the last day of the 45-day period referred to in paragraph (a)), to purchase all or any portion of the Shares which were not purchased by the Designated Management Optionees; and (c) each of the Designated Management Optionees shall have an additional option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees, and the Designator, within the 105-day period next following the date on which the Company has notified the Designator that such Management Shareholder's employment has terminated), to purchase all or any portion of the Shares of such Management Shareholder and each of his Permitted Transferees which were purchased upon exercise of an option after termination of the Management Shareholder's employment; and (d) the Company shall have an option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees and the Designator, within the 30-day period next following the last day of the 105-day period referred to in the immediately preceding paragraph (c)), to purchase any or all of the Shares subject to the options created by such paragraph (c) which were not purchased by the Designated Management Optionees; all in the manner, for the price and on the terms and conditions contained in Sections 3.7 through 3.13, both inclusive, of this Article III. A-19 3.2 Death or Permanent Disability of a Type 2 Management Shareholder. Upon the death of a Type 2 Management Shareholder while such Type 2 Management Shareholder is an employee of any member of the Ward Group; or in the event the employment of a Type 2 Management Shareholder with the Ward Group shall be terminated by reason of Permanent Disability: (a) the personal representative of the deceased or Permanently Disabled Type 2 Management Shareholder or the Permanently Disabled Type 2 Management Shareholder (as the case may be), and each Permitted Transferee of the deceased or Permanently Disabled Type 2 Management Shareholder, shall each have the option (exercisable by written notice delivered to the Company and the Designator not later than 90 days after the date of death or the date of termination of the Type 2 Management Shareholder's employment with the Ward Group by reason of Permanent Disability, as the case may be, of the Type 2 Management Shareholder), to sell all or any portion of the Shares then owned by such respective Shareholders in accordance with paragraph (b); (b) if the options described in paragraph (a) are exercised, the Designated Management Optionees shall each have the option (exercisable by written notice delivered to the Company and each Shareholder having an option to sell Shares pursuant to paragraph (a), within the 30-day period next following the expiration of the 90-day period described in paragraph (a)) to purchase all or any portion of the Shares as to which the options to sell described in paragraph (a) were exercised, and the Company shall purchase the Shares as to which the options described in paragraph (a) to sell were exercised which the Designated Management Optionees have not elected to purchase pursuant to this paragraph (b); (c) if and to the extent the options described in paragraph (a) are not exercised, the Designated Management Optionees shall have the option (exercisable by written notice delivered to each Shareholder having an option to sell Shares to the Company pursuant to paragraph (a) and the Company within the 30-day period next following the 90-day period referred to in paragraph (a)), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not exercise their respective options to sell as set forth in paragraph (a); and (d) the Company shall have the option (exercisable by written notice to each Shareholder having an option to sell Shares to the Company pursuant to paragraph (a) within the 30-day period next following the expiration of the 30-day period referred to in paragraph (c)), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not exercise their respective options to sell as set forth in paragraph (a) and as to which the Designated Management Optionees did not exercise their respective options to purchase as set forth in paragraph (c); all in the manner, for the price, and on the terms and subject to the conditions contained in Sections 3.7 through 3.13, both inclusive, of this Article III. 3.3 Death of Type 2 Management Shareholder Following Termination of Employment. Upon the death of a Type 2 Management Shareholder following termination of the Type 2 Management Shareholder's employment with the Ward Group (a "Post-Termination Death"), in the case where that Type 2 Management Shareholder and his Permitted Transferees did not previously sell all Shares owned by them respectively pursuant to Section 3.1 or Section 3.2: (a) each of the Designated Management Optionees shall have an option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees, and the Designator, within the 90-day period next following the date on which the Company has notified the Designator that such Management Shareholder has died), to purchase all or any portion of the Shares owned by such Management Shareholder and each of his Permitted Transferees; and (b) the Company shall have an option (exercisable by service of written notice upon such Management Shareholder, each of his Permitted Transferees, and the Designator, within the 30-day period next following the last day of the 90-day period referred to in paragraph (a)), to purchase all or any portion of the Shares which were not purchased by the Designated Management Optionees; all in the manner, for the price and on the terms and conditions contained in Sections 3.7 through 3.13, both inclusive, of this Article III. A-20 3.4 Notice of Death. In order to effectuate the exercise of the options set forth in Sections 3.2 and 3.3 in the event of the death of a Type 2 Management Shareholder, the personal representative of the deceased Type 2 Management Shareholder shall give written notice of such Type 2 Management Shareholder's death to the Company within 90 days after the date of such death, regardless of whether such personal representative shall be entitled to exercise any option granted to him pursuant to this Article III. Forthwith following the receipt of such notice, the Company shall deliver a copy thereof to the Designator. In the event such notice is not so given by the personal representative of the deceased Type 2 Management Shareholder, the period of time in which the options set forth in Sections 3.2 and 3.3 may be exercised shall be appropriately extended. 3.5 Termination of Brennan's Employment or Death. In the event of: (a) the termination of Brennan's employment with the Ward Group which occurs during the three year period commencing on the Closing Date by reason of his voluntary resignation or termination for Cause: (i) Brennan and each of his Permitted Transferees shall each have the option (exercisable by written notice delivered to the Company not later than 60 days after the date of termination of Brennan's employment with the Ward Group) to sell to the Company all or any portion of the Shares then owned by such respective Shareholders, and the Company shall purchase all such Shares with respect to which such options to sell were exercised; and (ii) the Company shall have the option (exercisable by written notice to Brennan and each of his Permitted Transferees within the 30-day period next following the expiration of the 60-day period referred to in paragraph (a)(i)), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not exercise their respective options to sell as set forth in paragraph (a), and Brennan and his Permitted Transferees shall sell all such Shares with respect to which such options were exercised by the Company; provided, however, that the number of Shares as to which Brennan, his Permitted Transferees and the Company may exercise such options, shall not, in the aggregate, exceed 20% of the Shares which Brennan and his Permitted Transferees owned on the Closing Date; provided, further, that if the options exercised by Brennan and his Permitted Transferees, in the aggregate, exceed 20% of the Shares which Brennan and his Permitted Transferees owned on the Closing Date, the Shares which Brennan owned on the date of exercise of his option shall be the first Shares so sold to the Company pursuant to this paragraph (a); and provided, further, that if the Company exercises the option set forth in paragraph (a)(ii), the numbers of Shares which the Company shall purchase, in the aggregate, from Brennan and his Permitted Transferees shall be allocated among them in such manner as Brennan and his Permitted Transferees shall agree, and in the absence of such an agreement, in proportion to their respective ownership of Shares; (b) the termination of Brennan's employment with the Ward Group which occurs by reason of the Ward Group's termination of Brennan's employment without Cause, Brennan and each of his Permitted Transferees shall each have the option from time to time (exercisable by written notice delivered to the Company at any time and from time to time after the date of termination of Brennan's employment with the Ward Group), to sell all or any portion of the Shares then owned by such respective Shareholders, and the Company shall purchase all such Shares with respect to which such options were exercised; (c) the termination of Brennan's employment with the Ward Group which occurs by reason of his death or Permanent Disability: (i) Brennan or his personal representative (as the case may be) and each of his Permitted Transferees shall each have the option, exercisable from time to time prior to the fifth anniversary of the date of termination of Brennan's employment with the Ward Group by written notice delivered to the Company at any time and from time to time prior to said fifth anniversary, to sell all or any portion of the Shares then owned by such respective Shareholders to the Company, and the Company shall purchase such Shares with respect to which such options were exercised; and A-21 (ii) the Company shall have the option (exercisable by written notice to each Shareholder having an option to sell Shares to the Company pursuant to paragraph (c)(i) within the 90-day period next following the date of termination of Brennan's employment with the Ward Group), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not theretofore exercise their respective options to sell as set forth in paragraph (c)(i), and Brennan or his personal representative (as the case may be) and his Permitted Transferees shall sell all such Shares with respect to which the Company has exercised its option to the Company; provided, however, that the number of Shares as to which the Company may exercise such options, when added to the number of Shares as to which Brennan or his personal representative (as the case may be) and his Permitted Transferees have theretofore exercised their options pursuant to paragraph (c)(i), shall not exceed 35% of the Shares which Brennan and his Permitted Transferees own on the Closing Date; (d) the death of Brennan following the termination of his employment with the Ward Group, Brennan's personal representative, and each of his Permitted Transferees, shall each have the option, exercisable from time to time prior to the fifth anniversary of the date of Brennan's death, by written notice delivered to the Company at any time and from time to time prior to said fifth anniversary, to sell all or any portion of the Shares then owned by such respective Shareholders to the Company, and the Company shall purchase all such Shares with respect to which such options were exercised; all in the manner, for the price, and on the terms and subject to the conditions contained in Sections 3.7 through 3.13, both inclusive, of this Article III. Notwithstanding the preceding provisions of paragraphs (b), (c) and (d) of this Section 3.5, permitting multiple exercises of options by Brennan or his personal representative (as the case may be) and his Permitted Transferees, no such option may be exercised by each of Brennan, his personal representative or any Permitted Transferee more frequently than once in each one year period commencing on the date on which the first such option arose or an anniversary of that date. The time for exercise of such options within any such one year period shall be determined by Brennan or his personal representatives (as the case may be), and all such options shall be exercised concurrently by all optionees desiring to exercise their respective options. 3.6 Death of Other Type 1 Management Shareholder. In the event of the death of any Type 1 Management Shareholder other than Brennan: (a) the personal representative of the deceased Type 1 Management Shareholder, and each Permitted Transferee of the deceased Type 1 Management Shareholder (as the case may be), shall each have the option (exercisable by written notice delivered to the Company and the Designator not later than 90 days after the date of death of the Type 1 Management Shareholder) to sell all or any portion of the Shares then owned by such respective Shareholders; (b) if the options described in paragraph (a) are exercised, the Designated Management Optionees shall each have the option (exercisable by written notice delivered to the Company and each Shareholder having an option to sell Shares pursuant to paragraph (a), within the 30-day period next following the expiration of the 90-day period described in paragraph (a)) to purchase all or any portion of the Shares as to which the options to sell described in paragraph (a) were exercised; and (c) the Company shall purchase the Shares as to which the options described in paragraph (a) to sell were exercised which the Designated Management Optionees have not elected to purchase pursuant to paragraph (b); all in the manner, for the price, and on the terms and subject to the conditions contained in Sections 3.7 through 3.13, both inclusive, of this Article III. 3.7 Purchase Price of Shares. The aggregate purchase price ("Purchase Price") of Shares to be purchased pursuant to Sections 3.1, 3.2, 3.3, 3.5 or 3.6 shall be the following: (a) where Shares are to be purchased pursuant to Section 3.1, 3.2 or 3.3: A-22 (i) if the product of the Fair Market Value per Share multiplied by the aggregate number of Shares to be purchased is equal to or less than the sum of (x) the Acquisition Price of all Shares which are not Vested Shares multiplied by the aggregate number of such Shares, plus (y) the Fair Market Value per Share of all Shares which are Vested Shares multiplied by the aggregate number of such Shares, then the Purchase Price shall be the product of the Fair Market Value per Share, multiplied by the aggregate number of Shares to be purchased; (ii) if subparagraph (i) of this paragraph (a) is not applicable, subject to paragraph (e) below, the Purchase Price shall be equal to the sum of (x) the product of the Fair Market Value per Share multiplied by the number of Vested Shares, plus (y) the product of the Acquisition Price multiplied by the number of Shares which are not Vested Shares to be purchased; (b) Intentionally omitted; (c) where Shares are to be purchased pursuant to Section 3.5 (other than paragraph (a) thereof) or Section 3.6, the Purchase Price shall be the product of the Fair Market Value per Share, multiplied by the aggregate number of Shares to be purchased; (d) where Shares are to be purchased pursuant to Section 3.5(a), the purchase price of each of the Shares shall be the book value thereof as of the last day of the month next preceding the month in which Brennan's employment with the Ward Group terminated, as determined by the Company's chief financial officer in accordance with the generally accepted accounting principles applied by the Company in the preparation of its consolidated financial statements; (e) where options are exercised pursuant to Section 3.1 or 3.3 for less than all of the Shares owned by a Management Shareholder and his Permitted Transferees, in determining the Purchase Price in accordance with paragraph (a) or (b), the Shares which are not Vested Shares shall be deemed to have been purchased or sold first; (f) for the sole purpose of computing the Purchase Price in connection with a purchase of Shares pursuant to Section 3.3, in computing that portion of the Purchase Price which is allocable to Shares which are not Vested Shares, the Acquisition Price of each of the Shares which are not Vested Shares shall be increased by a simple interest factor of 8% per annum calculated from the Valuation Date to the Article III Closing Date, but the Acquisition Price, as so increased, shall not exceed the Fair Market Value per Share. 3.8 Manner of Payment. Subject to the provisions of Article IV, the Purchase Price shall be paid in the following manner: (a) except as otherwise provided in paragraph (c), an amount equal to 25% of the Purchase Price of all Shares shall be paid in cash on the Article III Closing Date; provided, however, that if the Company is a purchaser of Shares and the Company or any member of the Ward Group shall have obtained insurance on the life of a Management Shareholder whose Shares (or Shares owned by his Permitted Transferees) are to be purchased pursuant to Section 3.2, 3.3, 3.5 (c), 3.5(d) or 3.6, for the purpose of providing funds with which to purchase such Shares, and in the event the proceeds of such insurance ("Insurance Proceeds") exceed the amount which would be payable by the Company on the Article III Closing Date in cash but for this proviso, and if the Insurance Proceeds have been collected as of the Article III Closing Date, an amount equal to the Insurance Proceeds, but not in excess of the Purchase Price for the Shares purchased by the Company, shall be paid in cash on the Article III Closing Date (it being understood that if the Insurance Proceeds are collected after the Article III Closing Date, the Company shall make a mandatory prepayment under the note(s) delivered by the Company pursuant to paragraph (b) of the amount by which the Insurance Proceeds exceeds the amount which was paid on the Article III Closing Date, forthwith following the collection thereof, with all installments coming due under said note(s) to be reduced ratably); A-23 (b) except as otherwise provided in paragraph (c), the balance of the Purchase Price shall be paid in three equal annual installments on the first through third anniversaries, both inclusive, of the Article III Closing Date. The principal amount of the balance of the Purchase Price remaining from time to time unpaid shall bear interest, payable on the same dates as each installment of principal, at a rate per annum equal to the lowest rate of interest which will not result in any portion of the Purchase Price being deemed to be unstated interest or original issue discount under the provisions of the Internal Revenue Code of 1986. If said provisions are inapplicable for any reason, the interest rate shall be 8% per annum; (c) notwithstanding the preceding provisions of this Section 3.8, in the event of a purchase of Shares following the voluntary termination of employment of a Type 2 Management Shareholder with the Ward Group (other than by reason of normal retirement in accordance with the Ward Group's retirement policies), or the termination of employment of such Management Shareholder with the Ward Group for Cause, the amount which shall be paid on the Article III Closing Date shall equal 16 2/3% of the Purchase Price, and the balance of the Purchase Price shall be paid in five equal annual installments on the first through fifth anniversaries, both inclusive, of the Article III Closing Date, plus interest, payable on the same dates as each installment of principal, at the rate determined pursuant to paragraph (b); (d) the Purchase Price shall be payable by the Designated Management Optionees and the Company in proportion to their respective purchases of Shares pursuant to this Article III. 3.9 Notes and Security. The portion of the Purchase Price which has not been paid in cash on the Article III Closing Date shall be evidenced and secured as follows: (a) the portion of the Purchase Price which is not paid on the Article III Closing Date shall be evidenced by a non-negotiable secured promissory installment note(s) made by the Company and/or the Designated Management Optionee(s) purchasing Shares (as the case may be). Each such note or notes shall be in a commercially reasonable form of promissory note given to evidence an installment indebtedness, providing for payment of the unpaid balance of the Purchase Price, and interest thereon, all as provided in Section 3.8. Each such promissory installment note shall provide for acceleration in the event of non-payment after a reasonable grace period, and shall provide that it may be prepaid at any time or from time to time, in whole or in part, without premium, penalty or notice. Except as provided in Section 3.8 (a), all prepayments shall be applied against installments coming due in the inverse order of their maturity. If there is more than one seller of such Shares, a separate note shall be issued to each seller of such Shares. Each promissory note which is made by the Company shall provide that the obligations thereunder are subordinated to the extent provided in, and are subject to the provisions of, Article IV. Each note shall provide that a default under any note made by the party issuing it to a Management Shareholder or his Permitted Transferees pursuant to this Article III shall be a default under all notes made by that party to such Management Shareholder and his Permitted Transferees pursuant to this Article III. Each such note or notes shall be substantially in the form contained in Exhibit B attached hereto; (b) each note shall be secured, at the option of the purchaser of the Shares, by either (x) a pledge, meeting the requirements of the Illinois Uniform Commercial Code, of a number of the Shares purchased which have an aggregate purchase price at the time of the pledge (determined in the manner provided in Section 3.7 and in the following sentences) equal to the original principal amount of such note, or (y) a standby letter of credit reasonably satisfactory to the Shareholder whose Shares are being sold. If Shares are to be pledged, for the purposes of determining the type and number thereof, on the Article III Closing Date the Company and the Designated Management Optionees shall be deemed to have made payment in full for a type (Vested Shares or Shares which are not Vested Shares, as the case may be) and number of Shares which has an aggregate value (determined as provided herein) equal to the amount so paid, and the Shares which are so deemed to have been paid for in full shall not be subject to the pledge, and only the balance of the Shares shall be subject to the pledge. In determining the value of the Shares which are deemed to have been paid for in full on the Article III Closing Date in accordance with the A-24 two preceding sentences, Shares which are not Vested Shares shall first be deemed to have been paid for in full, until all of such Shares have been deemed to have been paid for in full. If Shares are to be pledged, at the option of the pledgor, the Shares to be pledged shall be held by an escrowee reasonably satisfactory to the pledgor, pursuant to an Escrow Agreement containing terms and provisions which are reasonably satisfactory to the pledgor. 3.10 Fair Market Value. The Fair Market Value per Share of Shares purchased pursuant to this Article III shall be determined as follows: (a) unless a public market for the Shares exists, the Fair Market Value per Share of each of the Shares shall be based upon the fair market value of the consolidated common equity of the Company for the fiscal year in which the Valuation Date occurs (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the fiscal year in which the Article III Closing Date occurs (in the case of a purchase of Shares pursuant to Section 3.3, 3.5 or 3.6), adjusted as provided herein. The Valuation Date (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the Article III Closing Date (in the case of a purchase of Shares pursuant to Section 3.3, 3.5 or 3.6) is referred to herein as the "Applicable Date". Subject to the following provisions, the fair market value of the consolidated common equity of the Company shall be determined annually by the Board of Directors, as of the first day of the then-current fiscal year of the Company, in its reasonable discretion and in good faith, as soon after the commencement of each fiscal year of the Company as possible. In the event the fair market value of the consolidated common equity of the Company, as so determined, would exceed 150% of the consolidated common equity of the Company (determined in accordance with the generally accepted accounting principles applied by the Ward Group) as of the first day of the fiscal year for which the determination is to be made, the affirmative vote of not less than 2/3 of the members of the Board of Directors shall be required in order to determine the amount of the excess. The Board of Directors may in its discretion retain an independent investment banker to make recommendations to the Board of Directors as to the fair market value of the consolidated common equity of the Company. Each such determination shall be effective as of the first day of the then-current fiscal year, and remain in effect with respect to all Applicable Dates occurring during that fiscal year; provided, however that the fair market value of the common equity as so determined by the Board of Directors shall be adjusted by adding: (i) an amount equal to the Fair Market Value at the date of grant for the Shares underlying all Options and Purchase Rights and other options or rights to acquire shares of common stock outstanding and unexpired on the Article III Closing Date; (ii) the amount of cash and other consideration (including any difference between the Fair Market Value at the date of grant and the exercise price) received or receivable by the Company during the period commencing on the first day of the fiscal year in which the Applicable Date occurs and ending on the Article III Closing Date (the "Adjustment Period") on account of the exercise of any Options, Purchase Rights, or other options or rights to acquire shares of common stock; (iii) the aggregate consideration received by the Company for shares of common stock issued during the Adjustment Period and not accounted for in either (i) or (ii) above; and by subtracting: (iv) the aggregate amount of dividends paid or payable by the Company on its common stock during the Adjustment Period; and (v) the aggregate amount paid by the Company to redeem, repurchase or otherwise acquire for consideration shares of its common stock during the Adjustment Period; and the said fair market value of the consolidated common equity of the Company, as so adjusted, shall be the fair market value of the consolidated common equity of the Company. The foregoing adjustments shall be made by the Company's chief financial officer, acting reasonably and in good faith and in accordance with the provisions of this Section 3.10. For the first fiscal year of the Company, the parties A-25 agree that the fair market value of the consolidated common equity of the Company as of the first day of such first fiscal year shall be $10,000,000. Once the fair market value of the consolidated common equity of the Company has been determined as provided in the foregoing provisions of this paragraph (a), the Fair Market Value per Share of each of the Shares to be purchased pursuant to this Article III shall be determined as follows: (vi) the Fair Market Value per Share of each of the Class A Shares shall be the amount determined as follows: a. First, at any time when the Fully Diluted Outstanding Amount on the date of determination does not exceed the Series 1 Amount, the fair market value of the consolidated common equity of the Company shall be multiplied by a fraction the numerator of which is the Fully Diluted Outstanding Amount and the denominator of which is the sum of the Fully Diluted Outstanding Amount plus the number of outstanding Class B Shares on the day immediately preceding the Article III Closing Date; or b. at any time when the Fully Diluted Outstanding Amount on the date of determination exceeds the Series 1 Amount, but the Fully Diluted Non-Series 3 Outstanding Amount does not exceed the Series 1 Amount, the amount which would be determined if the immediately preceding Section 3.10(a)(vi)a were applicable and the Fully Diluted Outstanding Amount were equal to the Series 1 Amount shall be multiplied by a fraction the numerator of which is the Fully Diluted Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus fifty percent (50.0%) of the excess of the Fully Diluted Outstanding Amount over the Series 1 Amount on the day immediately preceding the Article III Closing Date; or c. at any time when the Fully Diluted Outstanding Amount as of the date of determination exceeds the Series 1 Amount (and Section 3.10(a)(vi)b. is not applicable), the amount which would be determined if Section 3.10(a)(vi)a. were applicable and the Fully Diluted Outstanding Amount were equal to the Series 1 Amount shall be multiplied by (x) a fraction the numerator of which is the Fully Diluted Non-Series 3 Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus eighty-one point five percent (81.5%) of the excess of the Fully Diluted Non-Series 3 Outstanding Amount over the Series 1 Amount, and multiplied by (y) a fraction the numerator of which is the Fully Diluted Outstanding Amount and the denominator of which is the sum of the Fully Diluted Non-Series 3 Outstanding Amount plus fifty percent (50.0%) of the sum of the number of Series 3 Shares outstanding plus the number of Series 3 Shares subject to purchase pursuant to Options granted under the Employee Stock Option Plan on the day immediately preceding the Article III Closing Date; d. Second, the amount determined pursuant to subparagraph a., b. or c., as applicable, shall be divided by the aggregate number of Class A Shares (without distinction as to series) on the day immediately preceding the Article III Closing Date, with Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan being treated, for the purposes of this subparagraph d., as being outstanding Shares; provided, however, that no adjustment to the Fair Market Value per Class A Share as calculated as of the first day of the then-current fiscal year shall be required unless such adjustment would result in an increase or a decrease of at least 1% from the amount as so determined as of the beginning of the then-current fiscal year; (vii) the Fair Market Value per Share of each of the Class B Shares shall be the amount determined by (x) subtracting from the fair market value of the consolidated common equity of the Company the aggregate Fair Market Value per Share of all of the Class A Shares of all series, as determined pursuant to subparagraph (vi), and (y) dividing the resulting number by the total number of Class B Shares which are outstanding as of the day immediately preceding the Article III Closing Date. A-26 In the event the Article III Closing Date occurs prior to the date on which the appropriate fair market value of the consolidated common equity of the Company has been determined, the Purchase Price shall initially be determined on the basis of the most recent determination of the fair market value of the consolidated common equity of the Company and shall thereafter be adjusted as soon as the fair market value of the consolidated common equity of the Company for the current fiscal year has been determined. If necessary in order to accomplish any such adjustment, the parties shall immediately substitute new notes and/or exchange cash payments as soon as practicable after the amount of such adjustment is determined, so that the parties are placed in the same positions in which they would have been if the appropriate fair market value of the consolidated common equity of the Company had been known on the Article III Closing Date. (b) if a public market for the Shares exists, the Fair Market Value per Share shall be the Average Closing Price of the Shares during the period ("Trading Period") consisting of the ten trading days ending on the day immediately preceding the Valuation Date (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the date on which the first option arising under Section 3.3, 3.5 or 3.6, as the case may be, was exercised (in the case of a purchase of Shares pursuant to any of said sections). For the purposes of the preceding sentence: (i) if the Shares are listed on any national securities exchange or traded in the over-the-counter market and included in the NASDAQ National Market System, the Average Closing Price shall be the arithmetic mean of the last sale prices of the Shares on each day of the Trading Period on the national securities exchange where the Shares are principally traded if the Shares are listed for trading on such exchange, or in the over-the-counter market as reported by NASDAQ if the Shares are included in the National Market System; (ii) if the Shares are traded over-the-counter but are not included in the NASDAQ National Market System, the Average Closing Price shall be the arithmetic mean of the average of the closing bid and asked quotations on each day of the Trading Period. 3.11 Closing. Subject to the remainder of this Section 3.11 and to Section 4.1, any purchase of Shares pursuant to this Article III shall be consummated ("Article III Closing") at the Company's principal office at 10:00 a.m., prevailing business time, on the 30th day next following the last day on which the last option to purchase or sell such Shares which is granted pursuant to this Article III is exercisable ("Article III Closing Date"), or on such earlier day as designated by the purchaser(s) in the sole discretion of the purchaser(s) upon not less than three days prior notice to the Management Shareholder or his personal representative, as the case may be, and to the Management Shareholder's Permitted Transferees. If said date is a Saturday, Sunday or legal holiday, the Article III Closing shall occur at the same time and place on the next succeeding business day. At the Article III Closing, each person selling Shares shall deliver certificates representing the Shares being purchased, duly endorsed, and each shall furnish such other evidence, including applicable inheritance and estate tax waivers and releases, as may reasonably be necessary to effect the Transfers of Shares. The Company and/or the Designated Management Optionee(s) purchasing Shares shall make the payments, deliver the notes, and effect the pledges, which are set forth in Sections 3.8 and 3.9. 3.12 Priorities. In the event options to purchase Shares owned by a Management Shareholder or a Permitted Transferee shall arise under both Article II and Article III, as between the provisions of Article II, on the one hand, and Article III, on the other hand, if on the date on which an option to purchase or sell Shares arises under Article III, any option under Article II has not been exercised, or, if exercised, the purchase to be made pursuant to said exercise has not been closed, the priority of such Articles shall be determined by the Designator, but if the Designator fails to make any such determination by written notice delivered to the Company within 30 days next following the date on which the option or obligation under Article III arose, Article III shall have priority. 3.13 Failure to Deliver Shares. In the event the Company or any of the Designated Management Optionees exercise one or more options to purchase Shares pursuant to this Article III, or the Company becomes obligated to purchase Shares pursuant to this Article III, and in the event a Management Shareholder or Permitted Transferee whose Shares are to be purchased pursuant to this Article III fails to A-27 deliver them on the Article III Closing Date, the Company and/or the Designated Management Optionees purchasing Shares may elect to deposit the cash and promissory note(s) representing the Purchase Price with the Company's general counsel ("Escrow Agent"). In the event the Company and/or said Designated Management Optionees do so, the Shares shall be deemed for all purposes (including the right to vote and receive payment of dividends) to have been Transferred to the purchasers thereof, the Company or the Voting Trustee (as the case may be) shall issue new certificates representing the Shares to the purchasers thereof, and the certificates registered in the name of the Shareholders obligated to sell them (or the voting trust certificates, as the case may be) shall be deemed to have been cancelled and to represent solely a right to receive payment of the Purchase Price, with interest (if any) earned thereon, from the escrow. If the proceeds of sale have not been claimed by the former Shareholders whose Shares were purchased pursuant to this Article III prior to the third anniversary of the Article III Closing Date, the escrow deposits, and all interest (if any) earned thereon, shall be returned to the respective depositors, and the former Shareholders whose Shares were purchased shall look solely to the purchasers for payment of the Purchase Price. The Escrow Agent shall not be liable for any action or inaction taken by him in good faith, and shall have no liability whatsoever for failure to earn interest (or with respect to the amount of interest earned) on the escrow deposits. 3.14 Resale of Shares. The Company may resell to any employee or prospective employee of the Ward Group, including any person who is already a Management Shareholder, any Shares which the Company has repurchased pursuant to this Article III or Article II on such terms as the Board of Directors shall determine. At any time in which the Voting Trust Agreement is in effect, the employee shall join in and become a party to the Voting Trust Agreement, the Company shall, on behalf of the employee, issue shares of common stock to the Voting Trustee for the benefit of the employee, and the Voting Trustee shall issue to the employee certificates of beneficial interest constituting an equal number of Shares. 3.15 Modification of Options. Notwithstanding anything to the contrary contained herein, with respect to any options exercisable pursuant to Sections 3.1, 3.2 or 3.5 hereof as a result of termination of employment ("Termination") of a person whose short-swing profits with respect to purchases and sales of Shares immediately after such Termination would be subject to recapture under Section 16 of the Exchange Act ("Insider"), such options shall arise with respect to each such Insider and his or her Permitted Transferees, upon the earlier of (i) six months and one day after such Termination or (ii) the date of service of a Transfer Notice by such Insider or Permitted Transferee, as the case may be, on or after the date of such Termination; provided, however, that this Section 3.15 shall not apply to any Insider or Permitted Transferee who, as of the date of such Termination, holds any Shares, with respect to which any option under Article II has not been exercised and has not yet expired, or, if exercised, the purchase of Shares pursuant thereto has not been closed. All time periods contained elsewhere in this Agreement with respect to exercise of options modified pursuant to this Section 3.15 shall be adjusted in accordance with this Section 3.15. 3.16 Offset of Purchase Price. Notwithstanding anything to the contrary contained herein, in the event that any person selling Shares pursuant to this Article III is, immediately prior to the Closing, indebted to the Company or any Pledgee by virtue of the Line of Credit Program, then the Company (or any assignee thereof) may pay all or a portion of the Purchase Price by forgiving or offsetting such indebtedness in an amount equal to the amount of the Purchase Price to be so paid, by causing such indebtedness to be forgiven or offset in an amount equal to the amount of the Purchase Price to be so paid or by paying to the holder of such debt on behalf of such seller an amount equal to the amount of the Purchase Price to be so paid. ARTICLE IV Certain Limitations on Purchases of Shares 4.1 Restrictions on the Company's Right and/or Obligation to Purchase Shares. Notwithstanding anything to the contrary contained in this Agreement, the Company: (x) shall have the right to conditionally exercise any option arising under Article III to purchase Shares (other than an option arising under Section A-28 3.5(a) or (c)); (y) shall not be obligated to purchase Shares; and (z) shall not be obligated to make payments with respect to the Purchase Price of Shares it has theretofore purchased; to the extent unconditional exercise of such option, the purchase of such Shares or the making of such a payment, when taken together with all other unconditional exercises of options by the Company, all other purchases by the Company of Shares and the making of all other payments by the Company on account of Shares which the Company has purchased, would result in a violation of one of the Limitations (as herein defined). If this Section 4.1 is applicable, the following shall govern the exercises of such options and the making of such purchases and payments: (a) in the event the Company has an option to purchase Shares (other than an option arising under Section 3.5(a) or (c)) but, by virtue of the Limitations, is unable to purchase all Shares as to which it desires to exercise its option to purchase, it may unconditionally exercise its option as to the number of Shares which it may purchase without violation of the Limitations, and shall purchase those Shares on the Article III Closing Date, and may exercise said option as to the remaining Shares it desires to purchase conditioned upon its being able to do so without violation of the Limitations. In the event the Company is obligated to purchase Shares but is unable, by virtue of the Limitations, to pay the full amount which is payable by the Company on the Article III Closing Date with respect to the Shares which it is obligated to purchase, the Article III Closing shall take place with respect to the purchase of those Shares which the Company is able to purchase without violation of the Limitations; (b) with respect to those Shares which the Company was obligated, or conditionally exercised an option, to purchase but was unable, on the Article III Closing Date to purchase by virtue of the Limitations, the Article III Closing Date shall be extended with respect to such Shares by the period of such inability, but not in excess of one year from the date on which the Article III Closing Date would have occurred with respect to such Shares but for this Section 4.1. If said inability is cured in whole prior to the expiration of said one year period, the Article III Closing shall occur with respect to such Shares on the 30th day after the date on which the inability has been cured. If as of the end of said one year period the inability to purchase such Shares was cured in part, the Article III Closing shall take place with respect to the Shares as to which the inability was cured, on the 30th day after the expiration of said one-year period. If the Article III Closing Date is extended as to any Shares pursuant to this paragraph (b), the Purchase Price of such Shares shall be computed as if the Article III Closing had occurred with respect to such Shares on the date set forth in Section 3.11, without regard to this Section 4.1 (the "Originally Scheduled Article III Closing Date"). The Purchase Price of such Shares, as so computed, shall be reduced by the amount of any cash dividends paid or declared and distributions made or delivered with respect to such Shares, during the period commencing on the Originally Scheduled Article III Closing Date and ending on the actual Article III Closing Date with respect to such Shares, and shall bear interest for the period commencing on the Originally Scheduled Article III Closing Date and ending on the actual Article III Closing Date, at the rate of interest which would be applicable under Section 3.8(b) if the Article III Closing had occurred with respect to such Shares on the Originally Scheduled Article III Closing Date, and shall be payable on the Article III Closing Date, and the rate of interest which is payable on the portion of the Purchase Price which is payable in installments pursuant to Section 3.8(b) or (c) shall be that same rate of interest. To the extent that after the expiration of said one year period, the Company remains unable to purchase any of the Shares which it is otherwise obligated to purchase or has conditionally exercised an option to purchase, the Company shall be relieved of the obligation which it was unable to fulfill, the Company's conditional exercise of its option to purchase such Shares shall terminate, and the Shares which the Company was otherwise obligated, or had conditionally exercised an option, to purchase shall thereafter remain subject to all applicable provisions of this Agreement; (c) in applying the foregoing provisions of this Section 4.1, the Shares which are not Vested Shares shall be deemed to have been purchased or sold first; (d) if after the Article III Closing the Company is precluded from making all or any portion of an installment payment on account of the unpaid balance of the Purchase Price, the Company's obligation to make such payment (or portion thereof) shall be tolled until the earlier of the date on which it is no A-29 longer precluded from making such payment (or portion thereof) or the first anniversary of the date on which the payment (or portion thereof) was due. During the time in which the Company's obligation is so tolled, interest shall continue to accrue on the payment which was due but not made, but the holder of any note made by the Company which represents the unpaid portion of the Purchase Price of the Shares purchased by the Company shall not take any action to collect the payment due, or to accelerate the maturity of any payments not then due; (e) if after the expiration of the period of time in which the Company's obligation has been tolled pursuant to paragraph (d) the Company has not made the payment in full of the total amount then due, the holder of the note made by the Company shall have the right to foreclose the pledge of the Shares pledged by the Company, or draw against the letter of credit provided by the Company, as security therefor. If the holder does so, or takes other legal action to collect on the note, the holder's right to collect the amount owed by the Company to such holder (other than by way of foreclosure of the pledge of Shares pledged as collateral therefor or drawing on the letter of credit furnished by the Company in connection therewith) shall be subordinated to the Company's or Montgomery Ward's obligations under its then most junior subordinated debt and all debt which is senior thereto, and such holder's right to enforce its right to collect such amount shall be restricted to the extent of the maximum restriction contained in any of such debt with respect to such enforcement; provided, however, that notwithstanding any subordination provisions which may be contained in the instruments evidencing such debt, the holder of the note shall be entitled to collect the amount owing from the Company on account of the purchase of the Shares to the extent that payment of the amount sought to be collected would not result in a violation of any provisions of the instruments evidencing any debt of the Company which is senior to the holder's note and which permit distributions by, and/or intercompany dividends to, the Company in connection with its repurchases of Shares. For the purposes of the immediately preceding sentence, references to the Company shall be deemed to include references to Ward; (f) if any of the Designated Management Optionees shall have exercised options to purchase any of the Shares which are subject to purchase under Article III, the Article III Closing shall nonetheless take place with respect to the Shares as to which said options have been exercised, and the provisions of this Section 4.1 shall have no effect on the Shares as to which such options have been exercised, or on the obligations of the Designated Management Optionees with respect to payment of the Purchase Price thereof. 4.2 Definition of the Limitations. The Limitations shall consist of the following: (a) any provision of the law of the Company's state of incorporation which restricts the Company's ability to repurchase its Shares or restricts payments on account of the Purchase Price thereof; (b) any provision of any material contract to which a member of the Ward Group is a party (including, without limitation, loan agreements), and any provision of any Certificate of Incorporation of any member of the Ward Group, which would be violated by the Company's repurchase of its Shares, the making of payments on account of the Purchase Price thereof, or the payment of intercompany dividends or other distributions or advances to the Company so that it can repurchase Shares or make payments on account of the Purchase Price thereof; and (c) the Cash Payments Limitation then in effect. 4.3 Cash Payments Limitation. Except as otherwise determined by the Board of Directors, the Cash Payments Limitation shall be determined with respect to each fiscal year of the Company, and shall be equal to the sum of $5,000,000 (increased by $2,000,000 per fiscal year after the Company's initial fiscal year) plus the aggregate Insurance Proceeds collected during a fiscal year. To the extent the Cash Payments Limitation restricts the aggregate amount which can be paid by the Company in a fiscal year with respect to repurchases of its Shares, obligations of the Company to make payments shall be honored in the order in which they arose. A-30 4.4 Right of GE Capital to Cure Limitations. In the event the Company is unable to exercise an option pursuant to Section 3.5(a) or (c) because of the Limitations, and provided that the number of members of the Board of Directors has not theretofore been reduced as provided in Section 5.2(c), the Board of Directors (by action of a majority of the members of the Board of Directors designated by GE Capital) may waive the Cash Payments Limitation, or GE Capital may, on such terms as are reasonably agreed upon between the Company and GE Capital, lend to the Company sufficient funds to permit the exercise of such option without violation of the Limitations. ARTICLE V Corporate Governance Matters 5.1 Voting of Shares held by Management Shareholders. At any time in which this Article V of this Agreement is in effect and the Voting Trust Agreement is not in effect, and, in addition, with respect to any Shares which are owned by Management Shareholders or Permitted Transferees which for any reason are not subject to the provisions of the Voting Trust Agreement, on all matters requiring a vote of the Management Shareholders, as long as Brennan is a Management Shareholder, all Shares held by all Management Shareholders other than Brennan, and all Shares held by Permitted Transferees (other than the Shares acquired, on or about the date hereof, by Brennan's Permitted Transferees), shall be voted in the same manner that Brennan votes his Shares with respect to that matter. 5.2 Election of Directors. Subject to the limitations set forth herein, and in addition to any provisions relating to the election of directors by the holders of Preferred Stock which are contained in the Certificate of Incorporation and By-laws of the Company, at all times in which this Article V is in effect, the By-laws of the Company shall provide, and the Shareholders agree to vote, for the election of a Board of Directors consisting of nine members, five to be designated by the Designator and four to be designated by GE Capital. The By-laws shall further provide, and the Shareholders agree, that, disregarding any directors which may be elected by the holders of Preferred Stock pursuant to the provisions of the Company's Certificate of Incorporation: (a) Intentionally omitted; (b) at such time, if any, as GE Capital and the GE Capital Affiliates shall cease to own, in the aggregate, more than 50% of the Shares which GE Capital and the GE Capital Affiliates held on the Closing Date, the number of members of the Board of Directors which the Designator shall have the right to designate shall be increased by one and the number of members of the Board of Directors which GE Capital shall have the right to designate shall be reduced by one; (c) at such time, if any, as GE Capital and the GE Capital Affiliates shall cease to own, in the aggregate, 20% or more of the Shares which GE Capital and the GE Capital Affiliates held on the Closing Date, GE Capital shall no longer have the right to designate members of the Board of Directors in accordance with the foregoing provisions of this Section 5.2; and the number of directors to be elected shall be reduced to seven, five to be elected by the Class A Shareholders, voting as a class, and two to be elected by the Class B Shareholders, voting as a class; provided, however, that as long as that certain Account Purchase Agreement, dated as of June 24, 1988, between Ward and Montgomery Ward Credit Corporation (the "Account Purchase Agreement") shall be in effect and GE Capital or any GE Capital Affiliate shall own any Class B Shares, GE Capital shall have the right to elect one of the two directors to be elected by the Class B Shareholders. In the event of a vacancy on the Board of Directors, the party who had the right to designate the director whose seat is vacant shall have the right to designate the party who shall fill the vacancy. The party who had the right to designate a director shall also have the right to cause that director to be removed. A-31 5.3 Certain Supermajority Requirements. At all times in which this Article V is in force, the By-laws of the Company shall provide, and the Shareholders agree, that in addition to those other provisions of this Agreement which require the affirmative vote of not less than 2/3 of the members of the Board of Directors for the taking of actions by the Company, the affirmative vote of not less than 2/3 of the members of the Board of Directors (but, in the case of paragraph (t), instead of the aforesaid 2/3 requirement, the affirmative vote of a majority of the directors designated by the Designator or, at any time in which class voting is in effect, by a majority of the directors elected by the holders of Class A Shares) shall be required in order for the Company to take, or permit any member of the Ward Group to take, any of the following actions: (a) a merger, consolidation or other business combination (other than among members of the Ward Group and other than as part of an acquisition of assets permitted pursuant to paragraph (m)); (b) any of the following sales (other than intercompany sales within the Ward Group, sales solely of inventory in the ordinary course of business, and sale and leaseback transactions in the ordinary course of business or, to the extent out of the ordinary course of business, consistent with the past practices of the Ward Group): (i) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the Company) where the gross proceeds of sale (exclusive of assumption of liabilities) are in an amount equal to the greater of (A) $50,000,000 or (B) 20% of the consolidated common stockholders' equity of the Company as of the time of the sale; or (ii) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the Company) to the extent the gross proceeds of sale (exclusive of assumption of liabilities), when added to the gross proceeds of all other sales of assets of the Ward Group (exclusive of assumption of liabilities) occurring during that fiscal year, exceed an amount equal to the greater of (A) $100,000,000 or (B) 30% of the consolidated common stockholders' equity of the Company as of the time of the sale; provided, however, that notwithstanding the foregoing limitation, any single sale of assets for gross proceeds not exceeding $1,000,000 (exclusive of assumption of liabilities) shall be excluded from the foregoing computation; (c) amendments to the Certificate of Incorporation or By-laws of the Company (other than amendments to the By-laws permitted pursuant to Section 8.2); (d) payment of dividends on Shares (other than intercompany dividends among members of the Ward Group); (e) redemptions of Shares, other than pursuant to the provisions of this Agreement or the Employee Stock Option Plan; (f) public or private offerings of debt or equity securities of any member of the Ward Group, other than to other members of the Ward Group, pursuant to the Employee Stock Option Plan, Section 3.14 or Section 6.1 with respect to the offering of Shares in Demand Registrations on behalf of those Persons exercising their demand registration rights thereunder and Section 6.2 with respect to the offering of Shares in Piggyback Registrations on behalf of those Persons exercising their piggyback registration rights thereunder; (g) guaranties of any indebtedness in excess of $5,000,000 for borrowed money of any Person other than a member of the Ward Group; (h) setting of annual financial goals and targets; (i) the making of, or the entry into a binding commitment to make, any capital expenditures which would cause the amount expended (or committed to be expended) by the Ward Group for capital expenditures during a fiscal year to exceed the capital expenditure budget to be contained in the annual financial goals and targets of the Ward Group for such year by more than 10% of the budgeted amount; A-32 (j) borrowings by any member of the Ward Group which would cause the aggregate consolidated indebtedness of the Company for money borrowed to exceed an amount equal to $25,000,000, plus 5% of the amount of the consolidated common stockholders' equity of the Company measured at the time of such borrowings, but in determining both the amount of such borrowings and the necessity for approval of 2/3 of the members of the Board of Directors, the following borrowings shall be excluded: (i) borrowings made in connection with the acquisition, pursuant to the Purchase Agreement, of Ward, and under the term loan, revolving credit, tax standby letter of credit, "Tax Loan" and commercial letter of credit facilities established in connection with such acquisition, borrowings pursuant to the Subordinated Loan Agreement, dated June 23, 1988, between Ward and GE Capital, borrowings of any member of the Ward Group existing at the time of such acquisition, and borrowings made under any whole or partial refunding or replacement thereof without increasing the principal amount thereof, other than increases for closing costs (including, without limitation, prepayment penalties) incurred in connection with such refunding or replacement; (ii) purchase money financing incurred in accordance with the annual financial goals and targets of the Ward Group, and purchase money financing in connection with the issuance of notes pursuant to Sections 3.8 and 3.9 or Sections 3.6 and 3.7 of the Terms and Conditions, it being understood that purchase money financing shall include financing, refinancing or funding of the acquisition price of real property (or any interest therein) or other fixed assets acquired hereafter by a member of the Ward Group, regardless of whether said financing, refinancing or funding is done at the time of, or subsequent to, the acquisition of any such real property (or interest therein) or other fixed assets; (iii) Intentionally omitted; (iv) borrowings made for the purpose of redeeming any of the Preferred Stock; or (v) borrowings made pursuant to Section 4.4: (k) increases in compensation and/or fringe, welfare or pension benefits for any member of the Executive Committee of the Ward Group, other than in accordance with the practices and guidelines of the Ward Group in effect from time to time (it being understood that any material change from the current practices and guidelines shall require the affirmative vote of 2/3 of the members of the Board of Directors), but in no event beyond the increases being given for comparable executives in comparable retail businesses, as determined from published survey data and guidelines; (l) adoption of a plan of liquidation of the Company; (m) acquisition of assets (other than purchases of inventory and capital expenditures) which would cause the amount expended (or committed to be expended) by the Ward Group for the acquisition of such assets during a fiscal year to exceed the budget for acquisitions of such assets to be contained in the annual financial goals and targets of the Ward Group for such year by more than 10% of the budgeted amount; (n) entry into any transaction (exclusive of compensation and fringe, welfare and pension benefit arrangements with affiliates who are officers, directors or employees of the Ward Group for services rendered by them to the Ward Group) with an affiliate, as that term is defined in the Act, other than affiliates constituting members of the Ward Group; (o) seeking of a consent or waiver from a lender to a member of the Ward Group whose loan to the member of the Ward Group has a then outstanding principal balance in excess of $30,000,000, in any case in which consent or waiver is required for the entry into a transaction by the Ward Group and which, in the absence of such consent or waiver, would constitute a default or an event of default under the documents evidencing or pertaining to the loan made by the lender, other than any consent or waiver required in connection with: (i) the making of any borrowing permitted pursuant to paragraph (j)(ii), (iii), (iv) or (v); A-33 (ii) any mandatory prepayment obligation arising from the sale or financing of any real property (or interests therein) or other fixed assets; (iii) any prepayment occurring by reason of a "Change of Control" (as defined in one or more of the loan documents evidencing the loans referred to in subparagraph (j)(i) made in connection with the acquisition of Ward by the Company); or (iv) the incurring of any liens (other than for money borrowed); provided, however, that approval of 2/3 of the members of the Board of Directors for the seeking of such consent or waiver shall not be required if the transaction for which such consent or waiver is being sought (x) is specifically permitted pursuant to any of the other paragraphs of this Section 5.3 without the approval of 2/3 of the members of the Board of Directors, or (y) has been authorized by 2/3 of the members of the Board of Directors pursuant to any of said other paragraphs; (p) authorizing a Transfer of Shares pursuant to Section 2.2(a) in a case where the transferee is not a Management Shareholder, a Permitted Transferee, or a present or prospective employee of the Ward Group; (q) a waiver of the prohibitions on Transfers of Shares contained in Sections 2.3(a) and (c), as applied to Brennan; provided, however, that by action of a simple majority of the members of the Board of Directors, the references in those paragraphs to the third anniversary may be amended to constitute references to the second anniversary; (r) a waiver of the prohibitions on Transfers of Shares contained in Section 2.3(e); (s) any determination, pursuant to Section 4.3, of a Cash Payments Limitation other than that expressly set forth in that section; (t) without limiting the generality of any other provision of this Section 5.3, any of the following actions with respect to the Account Purchase Agreement: (i) termination thereof by agreement of the parties thereto; (ii) the exercise of a unilateral right of termination and the exercise of all other rights, options and elections granted thereunder to Ward; (iii) the giving of waivers and consents with respect thereto; and/or (iv) any amendment thereto; (u) the termination for Cause of Brennan's employment with any member of the Ward Group. 5.4 Certain Required Provisions of Certificate of Incorporation. At all times in which this Article V is in effect, the Certificate of Incorporation of the Company will contain provisions to the following effect, and the Shareholders agree that: (a) the common stock of the Company shall consist of two classes of Shares, Class A Shares and Class B Shares; and the Class A Shares shall consist of three series, Series 1, Series 2 and Series 3; (b) no amendment to the Certificate of Incorporation which increases the number of authorized Shares of any class or series of Common Stock shall be adopted without the affirmative vote of a majority of the holders of outstanding Series 1 Shares and the holders of a majority of the outstanding Class B Shares, each voting separately as a class; (c) in addition to the class voting required pursuant to paragraph (b), class voting will be provided to the extent necessary to effectuate the provisions of this Agreement requiring class votes; (d) the adoption of the Employee Stock Option Plan, the making of any amendments thereto, and the determination of the number of Shares as to which options to purchase shall be granted thereunder, shall require the affirmative vote of (i) a majority of the members of the Board of Directors, and (ii) the holders of a majority of the outstanding Series 1 Shares; and the By-laws of the Company shall provide that the determination of the manner in which Options shall be awarded and may be exercised (including the exercise prices of Options granted thereunder) shall be determined by the affirmative vote of a majority of the members of the Board of Directors; A-34 (e) except for the issuance of Shares pursuant to the exercise of Options granted under the Employee Stock Option Plan, in addition to complying with Section 5.3(f), the Company may issue authorized but unissued Class A Shares of either Series only upon the affirmative vote of the holders of a majority of the outstanding Class A Shares; and (f) in connection with the payment of dividends, proceeds payable in liquidation of the Company, and proceeds of a merger of the Company, the aggregate amount which is payable to holders of Shares, without distinction as to class or series, shall be allocated among the classes and series of Shares, as follows: (i) The portion of such dividends or proceeds which is payable to the holders of Class A Shares, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination does not exceed the Series 1 Amount, shall be the amount which bears the same ratio to the total amount of such dividends or proceeds as the Class A Amount bears to the sum of (x) the Class A Amount, plus (y) the number of Class B Shares outstanding as of the date of determination; and such portion of such dividends or proceeds which is payable to the holders of Class A Shares shall be allocated among such holders in proportion to their respective holdings of Class A Shares, without distinction as to series; (ii) The portion of such dividends or proceeds which is payable to the holders of Class A Shares, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount (but the Non-Series 3 Outstanding Amount as of the date of determination does not exceed the Series 1 Amount), shall be the product of the amount which would be payable to holders of Class A Shares if the immediately preceding Section 5.4(f)(i) were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by a fraction the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus fifty percent (50.0%) of the excess of the Outstanding Amount over the Series 1 Amount; and such portion of such dividends or proceeds which is payable to the holders of Class A Shares shall be allocated among such holders in proportion to their respective holdings of Class A Shares, without distinction as to series; and (iii) The portion of such dividends or proceeds which is payable to the holders of Class A Shares, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount (and Section 5.4(f)(ii) immediately preceding is not applicable), shall be the product of the amount which would be payable to holders of Class A Shares if Section 5.4(f)(i) above were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by (y) a fraction the numerator of which is the Non-Series 3 Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus eighty-one point five percent (81.5%) of the excess of the Outstanding Amount over the Series 1 Amount, and multiplied by (z) a fraction the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Non- Series 3 Outstanding Amount plus fifty percent (50.0%) of the number of shares of Series 3 Stock outstanding as of the date of such determination; and such portion of such dividends or proceeds which is payable to the holders of Class A Shares shall be allocated among such holders in proportion to their respective holdings of Class A Shares, without distinction as to series; and (iv) The portion of such dividends or proceeds which is payable to the holders of Class B Shares as a class, shall be the portion of the total amount of such dividends or proceeds which is not payable to the holders of Class A Shares in accordance with Section 5.4(f)(i), 5.4(f)(ii) or 5.4(f)(iii) above, as applicable; and such portion of such dividends or proceeds which is payable to the holders of the Class B Shares shall be allocated among such holders in proportion to their respective holdings of Class B Shares. 5.5 By-laws of Members of the Ward Group. Forthwith following the Closing Date, the Company shall cause the By-laws of each member of the Ward Group, other than the Company, to be amended to provide that no action may be taken by that member which, if such action was taken by the Company, would require A-35 that the affirmative vote of 2/3 of the members of the Board of Directors be obtained pursuant to Section 5.3 for the taking of such action, unless that action has also been authorized or ratified by 2/3 of the members of the Board of Directors. 5.6 Election of Chief Executive Officer. The person serving from time to time as the chief executive officer of the Company shall concurrently serve as the chief executive officer of Ward. 5.7 Agreement to Vote. All Shareholders (exclusive of Brennan's Permitted Transferees who have acquired Shares on or about the date hereof, it being understood that said Permitted Transferees are not bound by the provisions of this Section 5.7), and (without implication that the Voting Trustee is not otherwise a Shareholder) the Voting Trustee, agree that at all meetings of stockholders of the Company, including, without limitation, meetings called for the election and/or removal of directors, they will vote their respective Shares in such a manner as will accomplish the provisions of this Article V. The Shareholders' (and Voting Trustee's) agreement to vote their Shares as provided in this Article V shall include an agreement to execute written consents of stockholders of the Company in lieu of a meeting. 5.8 Recapitalization. In connection with any public offering of Shares (other than pursuant to the Employee Stock Option Plan), the Company shall have the right to cause a recapitalization of the Company to occur, in order to facilitate such public offering. Any such recapitalization, as nearly as possible, shall put the parties in the same relative positions with respect to equity ownership and voting control of the Company in which they were prior to the recapitalization, after taking into account any dilution resulting from outstanding but unexercised Purchase Rights or Options under the Employee Stock Option Plan. Each of the Shareholders, and the Voting Trustee, agrees to vote his Shares in favor of any recapitalization of the Company which meets the foregoing requirements, and to treat the shares of stock and other securities issued in such recapitalization as Shares under this Agreement. ARTICLE VI Registration Rights 6.1 Demand Registration Rights. The Shareholders shall have the following Demand Registration rights: (a) at any time after the earlier of (i) 90 days after the first registration of Shares under the Act (other than any registrations on Form S-4 or S-8 or any form substituting therefor or any registration statement filed in connection with an offering of securities or granting of Options primarily to employees of any member of the Ward Group or any registration statement filed to register shares primarily or exclusively for Transfer upon exercise of options pursuant to this Agreement or in connection therewith) or (ii) July 1, 1992, subject to paragraph (e) below of this Section 6.1 and to Section 6.12, a Demanding Group (as herein defined) may make a written request of the Company (a "Demand") for registration with the Commission, under and in accordance with the provisions of the Act and this Section 6.1, of all or part of its Shares (a "Demand Registration"), subject to the following: (i) for the purposes of this Article VI, the Management Shareholders and their Permitted Transferees, as a class, shall constitute one Group, and GE Capital and the present and former GE Capital Affiliates, as a class, shall constitute the other Group. As used herein, a "Demanding Group" shall mean a Group which shall make a Demand pursuant to this Section 6.1. Each Demanding Group shall be entitled to (x) two Demand Registrations (other than Demand Registrations on Form S-3 promulgated by the Commission or any successor form) and (y) at any time in which the Company is eligible to register Shares on Form S-3 or any successor form, an unlimited number of Demand Registrations on Form S-3. Any Demand made by the Management Shareholders, as a Demanding Group, shall only be made by the Designator in his sole discretion; (ii) the Company need not effect a Demand Registration unless such Demand Registration shall include at least 20% of the Shares held in the aggregate, as of the date hereof, by the Demanding Group making the Demand; A-36 (iii) if: a. the Company has filed, or has taken substantial steps toward filing, a Registration Statement (as herein defined) relating to any of the Company's securities, and the managing underwriter of the offering to which such registration relates or, if not an underwritten offering, the Board of Directors, is of the opinion that the filing of a Registration Statement relating to a Demand Registration would adversely affect the offering by the Company of, or the market for, its securities; or b. If the Board of Directors determines in the exercise of its reasonable judgment that the Company's ability to pursue a contemplated merger, acquisition, significant sale of assets or other significant business transaction (authorization for the negotiation of which has been obtained from the Board of Directors) would be adversely affected by the filing of a Registration Statement with respect to a Demand Registration; the Company may defer such Demand Registration for a single period not to exceed 180 days; and (iv) if the Company shall elect to defer any Demand Registration pursuant to the terms of subparagraph (iii), no Demand shall be deemed to have been made for the purposes of this Section 6.1 unless and until the Demand Registration has become effective in accordance with paragraph (b) below; All Demands made pursuant to this paragraph (a) shall specify the aggregate number of Shares requested to be registered, the intended methods of disposition thereof (if known) and the anticipated price per Share (expressed as a minimum price before expenses and commissions) at which the Shares will be sold pursuant to the Demand Registration; (b) a Demand shall not be counted as such for the purposes of paragraph (a) until the Registration Statement relating thereto shall have been (i) filed with the Commission, (ii) declared effective by the Commission and (iii) maintained continuously effective for a period of at least 120 days or such shorter period when all Shares included therein have been sold in accordance with such Demand Registration. If a Demand Registration shall have occurred, a subsequent Demand shall not be made by a Demanding Group prior to 180 days after the expiration of the period described in the preceding sentence; (c) immediately upon receipt of a Demand, the Company shall give written notice to all members of both Groups which have not made a Demand that the Demanding Group has made a Demand. Subject to the following provisions of this paragraph (c), and to paragraph (e) below of this Section 6.1 and Section 6.12, each of the members of both Groups which have not made a Demand may, upon written notice to the Company delivered within 15 days next following the date on which the Demand is made, elect to include all or any portion of their respective Shares in the Demand Registration. If, however, in any Demand Registration the managing underwriter or underwriters thereof (or in the case of a Demand Registration not being underwritten, an independent underwriter, of nationally recognized standing, selected by the holders of a majority of the Shares being registered therein, whose fees and expenses shall be borne by the Company), advise the Company in writing that in its or their reasonable opinion the number of securities proposed to be sold in such Demand Registration exceeds the number that can be sold in such offering without having a material adverse effect on the success of the offering or the market for the Shares, the Company will include in such Demand Registration only the number of Shares which, in the reasonable opinion of such underwriter or underwriters, can be sold without having a material adverse effect on the success of the offering or the market for the Shares, in the following order of priority: (i) first, the Shares requested to be included in such Demand Registration by the Shareholders who have made such requests in accordance with paragraphs (a) and (c) of this Section 6.1; provided, however, that if in the opinion of such underwriter(s), not all such Shares can be so included without having a material adverse effect on the success of the offering or the market for the Shares, the number of Shares which in the opinion of such underwriters can be included shall be allocated pro rata among the Shareholders requesting such registration on the basis of the respective numbers of Shares requested to be included by each of them; A-37 (ii)(second, Shares to be issued and sold by the Company requested to be included in such Demand Registration shall be included, but only to the extent that in the opinion of such underwriter(s) they may be included without having a material adverse effect on the success of the offering or the market for the Shares; (d) if a Demand Registration is to be an underwritten offering, the holders of a majority of the Shares to be included in such Demand Registration held by such members of the Demanding Group that initiated such Demand Registration shall select a managing underwriter or underwriters of recognized national standing to administer the offering, who shall be reasonably satisfactory to the Company; (e) notwithstanding the foregoing, at any time during which the Voting Trust Agreement is in effect, no Demand by a Management Shareholder or Permitted Transferee, and no request for inclusion of Shares by a Management Shareholder or Permitted Transferee pursuant to paragraph (c) of this Section 6.1 or paragraph (a) of Section 6.2, shall be made, unless the Voting Trustee shall have consented to releasing such Shares from the Voting Trust Agreement as of the effective date of the applicable Registration Statement. 6.2 Piggyback Registration Rights. The Shareholders shall have the following Piggyback Registration rights: (a) whenever during the period commencing on the date hereof and ending on the tenth anniversary of the date hereof the Company proposes to register any equity securities under the Act (other than any registrations on Form S-4 or S-8 or any form substituting therefor or any registration statement filed in connection with an offering of securities or granting of options primarily to employees of any member of the Ward Group or any registration statement filed to register shares primarily or exclusively for Transfer pursuant to this Agreement or in connection therewith), the Company will give written notice to all Shareholders, at least 30 days prior to the anticipated filing date, of its intention to effect such a registration, which notice will specify the proposed offering price (if known), the kind and number of securities proposed to be registered, the distribution arrangements and such other information that at the time would be appropriate to include in such notice. Subject to paragraph (b) below and to Section 6.12, the Company shall include in such registration all Shares with respect to which written requests for inclusion therein have been delivered by Shareholders to the Company within 15 business days after the date of delivery of the Company's notice (a "Piggyback Registration"). Except as may otherwise be provided in this Article VI, Shares with respect to which such requests for registration have been received will be registered by the Company and offered for sale to the public in a Piggyback Registration pursuant to this Article VI on the same terms and subject to the same conditions as are applicable to any similar securities of the Company included therein; (b) If in any Piggyback Registration the managing underwriter or underwriters thereof (or in the case of a Piggyback Registration not being underwritten, an independent underwriter, of nationally recognized standing, selected by the holders of a majority of the Shares being registered therein, whose fees and expenses shall be borne by the Company), advise the Company in writing that in its or their reasonable opinion the number of Shares proposed to be sold in such Piggyback Registration exceeds the number that can be sold in such offering without having a material adverse effect on the success of the offering of securities to be sold by, or the market for any equity securities of, the Company, the Company will include in such Piggyback Registration (in addition to the equity securities the Company proposes to sell) only the number of Shares owned by the Shareholders requesting such Piggyback Registration, if any, which, in the opinion of such underwriter or underwriters can be sold without having such a material adverse effect. If some, but not all, of such Shares can be so included, the number of Shares which in the opinion of such underwriter or underwriters can be included shall be allocated pro rata among the Shareholders requesting such Piggyback Registration on the basis of the respective numbers of Shares requested to be included by each of them; (c) if any Piggyback Registration is an underwritten offering, the Company will select a managing underwriter or underwriters of nationally recognized standing to administer the offering; and A-38 (d) notwithstanding anything to the contrary contained in this Section 6.2, the Company shall not be obligated to include any Shares in any registration statement filed by the Company if counsel to the Company who is reasonably satisfactory to the Shareholders who have made a request pursuant to paragraph (a) of this Section 6.2 shall render an opinion to such Shareholders to the effect that (i) registration is not required for the proposed Transfer of such Shares or (ii) a post-effective amendment to an existing registration statement filed simultaneously with the proposed Transfer would be sufficient for such proposed Transfer, and the Company in fact files such a post-effective amendment. 6.3 Registration Procedures. With respect to any Demand Registration or Piggyback Registration (generically, a "Registration"), the Company will, subject to subparagraph 6.1(a)(iii) and Section 6.5, as expeditiously as practicable: (a) prepare and file with the Commission as soon as practicable a registration statement or registration statements (the "Registration Statement") relating to the applicable Registration on any appropriate form under the Act which shall be available for use in connection with the sale of the Shares in accordance with the intended method or methods of distribution thereof; provided, however, that in the case of a Demand Registration the Company shall not be required to undergo or pay for any special audit to effect such Registration, and if a special audit would be required, either the Shareholders selling Shares thereunder shall agree to pay the costs and expense of such audit (and such costs and expenses shall not constitute Registration Expenses) or the Company shall have the right to delay the filing or effectiveness of the Registration Statement until such time as a regular audit in the ordinary course of the Company's business shall have been completed. The Company will use its best efforts to cause such Registration Statement to become effective. The Company shall not be deemed to have breached such "best efforts" undertaking if it shall take any action which is required under applicable law, or shall take any action in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets; (b) prepare and file with the Commission such amendments and post- effective amendments to the Registration Statement as may be necessary to keep each Registration Statement effective for a period of not more than 120 days after the date of its effectiveness, or such shorter period as will terminate when all Shares covered by such Registration Statement have been sold; cause each prospectus required in connection therewith (a "Prospectus ") to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period, in accordance with the intended method or methods of distribution by the sellers thereof as set forth in the Registration Statement or supplement to the Prospectus; (c) promptly notify the selling holders of Shares and the managing underwriters, if any (and, if requested by any such Person, confirm such advice in writing), of: (i) the date on which the Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement has been filed, and, with respect to the Registration Statement or any post-effective amendment, the date on which the same has become effective; (ii) any written request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) the receipt by the Company of any written request by any state securities authority for additional information or written notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) the happening of any event which makes any material statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue in any material respect or which requires the making of any changes in the Registration Statement, the Prospectus A-39 or any document incorporated therein by reference in order to make the statements therein not misleading in the light of the circumstances under which they were made; (d) make every reasonable effort (taking into account the interest of all selling Shareholders, the Company, and its officers and directors) to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if requested by the managing underwriter or underwriters or a holder of Shares being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the managing underwriters and the holders of a majority of the Shares being sold agree should reasonably be included therein relating to the plan of distribution with respect to such Shares, including, without limitation, in the case of an underwritten offering, information with respect to (i) the number of Shares being sold to such underwriters in a firm commitment underwriting and the purchase price being paid therefor by such underwriters, and (ii) any other terms of the underwriting; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable upon being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish to each selling holder of Shares and each managing underwriter (if any), without charge, at least one signed copy of the Registration Statement and any amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and, to the extent reasonable, all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Shares and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such selling holder of Shares and underwriters may reasonably request; the Company consents to the use, in accordance with the Act, of each Prospectus or any amendment or supplement thereto by each of the selling holders of Shares and the underwriters, if any, in connection with the offering and sale of the Shares covered by such Prospectus or any amendment or supplement thereto; (h) in connection with any Registration of Shares, use its best efforts to register or qualify or cooperate with the selling holders of Shares, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Shares for offer and sale under the securities or "blue sky" laws of such jurisdictions as the holders of not less than 25% of the Shares covered by the Registration Statement (or, in the case of Shares being sold by Management Shareholders and/or their Permitted Transferee, the Designator) or the managing underwriter reasonably requests in writing, considering the amount of Shares proposed to be sold in each such jurisdiction, and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Shares covered by the Registration Statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to taxation in any such jurisdiction or to submit to the general service of process in any such jurisdiction; (i) cooperate with the selling holders of Shares and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing the Shares to be sold free from any restrictive legends; and cause such Shares to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Shares to the underwriters; (j) use reasonable efforts to cause the Shares covered by the applicable Registration Statement to be registered with or approved by such governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Shares in the jurisdictions contemplated by paragraph (h) of this Section 6.3; (k) upon the occurrence of any event contemplated by subparagraph (ii), (iv) or (v) of paragraph (c) of this Section 6.3, prepare any required supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Shares, the Prospectus will A-40 not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (l) not later than the effective date of the applicable Registration Statement, provide a CUSIP number for all Shares; (m) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith which are reasonably required in order to expedite or facilitate the disposition of such Shares, and, in such connection, whether or not an underwriting agreement is entered into and whether or not the Registration is an underwritten Registration: (i) make such representations and warranties to the holders of such Shares and the underwriters, if any, in such form, substance and scope as are reasonably required and customarily made by issuers to underwriters in primary underwritten offerings; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Shares being sold) addressed to each selling holder and the underwriters, if any, covering the matters reasonably required and customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters and holders; (iii) use its best efforts to obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Shares and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters received by underwriters in connection with primary underwritten offerings; (iv) if an underwriting agreement is entered into, cause to be included therein the indemnification provisions and procedures set forth in Section 6.7 with respect to all parties to be indemnified pursuant to said Section; and (v) deliver such documents and certificates as may reasonably be requested by the holders of a majority of the Shares being sold and the managing underwriters, if any, to evidence compliance with subparagraph (m) (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement as and to the extent required thereunder; (n) make available for inspection by a representative of the holders of a majority of the Shares, any underwriter participating in any disposition pursuant to such Registration, and any attorney or accountant retained by the sellers or underwriter, at reasonable times and upon reasonable prior notice, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; provided, however, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order of any regulatory body having jurisdiction; (o) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders (which may be accomplished through compliance with Rule 158 under the Act), earning statements satisfying the provisions of Section 11(a) of the Act, for the twelve month period: (i) commencing at the end of any fiscal quarter in which Shares are sold to underwriters in a firm commitment or best efforts underwritten offering; or (ii) if not sold to underwriters in such an offering, commencing with the first month of the Company's first fiscal quarter after the quarter in which the Registration Statement became effective. A-41 Said earning statements shall be furnished within 45 days after the expiration of such 12-month period unless such 12-month period constitutes a fiscal year, in which latter event said statements shall be furnished within 90 days after the expiration of such 12-month period; and (p) prior to the filing of the Registration Statement, any Prospectus or any other document that is to be incorporated by reference into the Registration Statement or the Prospectus after initial filing of the Registration Statement, provide copies of each such document to counsel to the selling holders of Shares and to the managing underwriters, if any; make the Company's representatives available, at reasonable times and upon reasonable prior notice, for discussion of such document; and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request. The Company may require each seller of Shares as to which any Registration is being effected to furnish to the Company in writing or orally as the Company may request, such information regarding such seller and the proposed distribution of such securities as the Company may from time to time reasonably request in writing. Each Shareholder agrees that upon receipt of notice from the Company of the happening of any event of the kind described in subparagraph (c)(ii), (iii) or (v) of this Section 6.3, such Shareholder will forthwith discontinue disposition of Shares pursuant to the Registration Statement until such Shareholder has received copies of the supplemented or amended Prospectus as contemplated by paragraph (k) of this Section 6.3, or until it has been advised in writing (the "Advice") by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus. If so directed by the Company, such Shareholder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Shareholder's possession), of the Prospectus covering such Shares which is current at the time of receipt of such notice. In the event the Company shall give any such notice, the 120-day period referred to in paragraph (b) of this Section 6.3 shall be extended by the number of days during the period from the date of the giving of such notice to the date when each seller of Shares covered by such Registration Statement shall have received either the copies of the supplemented or amended Prospectus contemplated by paragraph (k) of this Section 6.3 or the Advice (as the case may be), both dates inclusive. 6.4 Restrictions on Public Sale. Each Shareholder whose Shares are included in a Registration Statement agrees not to effect any public sale or distribution of the securities of the Company, of the same or similar class or classes as the securities included in such Registration Statement or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144, during the 15-day period prior to, and during the 90-day period beginning on, the effective date of such Registration Statement (except as part of such Registration), if and to the extent requested by the Company in the case of a non-underwritten public offering, or if and to the extent requested by the managing underwriter or underwriters, in the case of an underwritten public offering. 6.5 Other Registrations. The Company agrees not to effect any public sale or distribution of any securities similar to the Shares being registered, or any securities convertible into or exchangeable or exercisable for such securities (other than any such sale or distribution of such securities in connection with any merger or consolidation by the Company or any other member of the Ward Group or the acquisition by the Company or any other member of the Ward Group of the capital stock or substantially all of the assets of any other Person or the continuation of a distribution under a Registration Statement filed in connection with an offering of securities or granting of Options primarily to employees of any member of the Ward Group), during the 15-day period prior to, and during the 90-day period beginning on, the effective date of any Registration Statement filed in connection with a Demand made pursuant to Section 6.1(a). 6.6 Registration Expenses. Expenses incident to Registrations pursuant to this Article VI shall be borne as follows: (a) all expenses incident to the Company's performance of or compliance with this Agreement ("Registration Expenses") will be borne by the Company. Registration Expenses shall include, without limitation, all registration and filing fees, the fees and expenses of the counsel and accountants for the A-42 Company (including the expenses of any "cold comfort" letters), all other costs and expenses of the Company incident to the preparation, printing and filing under the Act of the Registration Statement (and all amendments and supplements thereto) and furnishing copies thereof and of the Prospectus included therein, the costs and expenses incurred by the Company in connection with the qualification of the Shares under the state securities or "blue sky" laws of various jurisdictions, the costs and expenses associated with filings required to be made with the National Association of Securities Dealers, Inc., the costs and expenses of listing the Shares for trading on a national securities exchange or authorizing them for trading on the NASDAQ National Market System and all other costs and expenses incurred by the Company in connection with any Registration hereunder. Notwithstanding the preceding sentence, Registration Expenses shall not include the costs and expenses of any Shareholders for underwriters' commissions and discounts, brokerage fees, transfer taxes with respect to the Shareholders' Shares to be Transferred pursuant to the Registration, or the fees and expenses of any counsel, accountants or other representatives retained by any Shareholder, all of which shall be paid by the respective Shareholders who are selling Shares pursuant to the Registration; (b) if the holders of Shares possessing, in the aggregate, a majority of the Shares covered by a Registration Statement which has been filed (or which the Company notifies such holders it is prepared to file within five days) pursuant to Section 6.1(a), but has not yet become effective, shall request the Company to withdraw (or to cease the preparation of) such Registration Statement, the Company shall use its best efforts to withdraw (or cease the preparation of) such Registration Statement; provided, however, that if prior to the date which is 180 days after the date on which the Registration Statement was withdrawn or the preparation thereof was ceased, the holders of 90% of the Shares covered by such Registration Statement may thereafter request the Company to refile (or to recommence the preparation of) such Registration Statement, if permitted under the Act, the Company shall use its best efforts to do so, and such Registration Statement shall not constitute a second Demand pursuant to Section 6.1; provided further, that as a condition to any such request, such holders of the Shares shall agree in writing to reimburse the Company for all Registration Expenses over and above those which the Company, by proceeding, would have incurred had such initial Registration Statement not been withdrawn (or the preparation thereof ceased). Except as provided above, in any offering initiated as a Demand Registration pursuant to Section 6.1(a), the Company shall pay all Registration Expenses in connection therewith, whether or not the Registration Statement relating thereto becomes effective. 6.7 Indemnity and Contribution. The parties shall be entitled to indemnity and contribution in connection with Registrations, as follows: (a) the Company agrees to indemnify each Shareholder, its officers, directors and agents and each Person who (within the meaning of the Act) controls such Shareholder, and hold them harmless against, all losses, claims, damages, liabilities and expenses (which, subject to the limitations herein contained, shall include reasonable attorneys' fees) resulting from (i) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary Prospectus or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except insofar as the same are caused by any such untrue statement or alleged untrue statement or omission or alleged omission being based upon or contained in any information relating to such Shareholder furnished in writing to the Company by such Shareholder or his, her or its representatives expressly for use therein or by such Shareholder's or such Shareholder's agent's failure to deliver a copy of the Registration Statement or Prospectus or any amendments or supplements thereto after the Company has furnished such Shareholder with a sufficient number of copies of the same), or (ii) the Company's failure to perform its obligations under this Section 6.7. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who (within the meaning of the Act) controls such Persons, to the same extent as provided above with respect to the indemnification of the holders of Shares. Notwithstanding the foregoing, the Company shall not be obligated to A-43 indemnify any holder of Shares (including the indemnified parties related to such holders) with respect to any losses, claims, damages, liabilities or expenses to the extent the same result from the breach by such holder of the agreements set forth in the last paragraph of Section 6.3; (b) in connection with any Registration in which any Shareholder is participating, each such Shareholder will furnish to the Company in writing such information with respect to such Shareholder as the Company reasonably requests for use in connection with any Registration Statement or Prospectus, and such Shareholder shall indemnify the Company, its directors and officers, each underwriter and each Person who (within the meaning of the Act) controls the Company or any such underwriter, and hold them harmless, against any losses, claims, damages, liabilities and expenses (which, subject to the limitations herein contained, shall include reasonable attorneys' fees) resulting from (i) a breach by such Shareholders of the provisions of the last paragraph of Section 6.3, (ii) any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements in the Registration Statement or Prospectus or preliminary Prospectus or any amendment or supplement thereto, in light of the circumstances under which they were made, not misleading, to the extent (but only to the extent) that such untrue statement or omission is contained in any information relating to such Shareholder so furnished in writing by such Shareholder or his, her or its representative specifically for inclusion therein, or (iii) such Shareholder's failure to perform his obligations under this Section 6.7. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information with respect to such Persons so furnished in writing by such Persons or their representatives specifically for inclusion in any Prospectus or Registration Statement; (c) any Person entitled to indemnification hereunder will: (i) give prompt written notice to the indemnifying party after the receipt by the indemnified party of a written notice of the commencement of any action, suit, proceeding or investigation or any threat thereof made in writing for which such indemnified party will claim rights of indemnification or contribution pursuant to this Section 6.7; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under paragraphs (a) and (b) next above, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice; and (ii) unless in such indemnified party's reasonable judgment a conflict of interest may exist between such indemnified and indemnifying parties with respect to such claim, permit such indemnifying party to unconditionally (but subject to the exceptions herein contained) assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If the defense is so assumed by the indemnifying party, the indemnifying party shall lose its right to defend and settle the claim if it fails to proceed diligently and in good faith with the defense of the claim. If the defense of the claim is not so assumed by the indemnifying party, or if the indemnifying party shall lose its right to defend and settle the third party claim as provided in the previous sentence, the indemnified party shall have the right to defend and settle the claim provided that the indemnified party gives the indemnifying party not less than 10 days prior written notice of any proposed settlement. If the defense is assumed by the indemnifying party and is not lost as provided above, subject to the provisions of the following sentence, the indemnifying party shall have the right to defend and settle the claim. Notwithstanding the preceding sentence, in connection with any settlement negotiated by an indemnifying party, no indemnified party will be required by an indemnifying party (x) to enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation, (y) to enter into any settlement that attributes by its terms liability to the indemnified party, or (z) to consent to the entry of any judgment that does not include as a term thereof a full dismissal of the litigation or proceeding with prejudice. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in any one A-44 jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or counsels; (d) if for any reason the rights of indemnification provided for in paragraphs (a) and (b) of this Section 6.7 are unavailable to an indemnified party as contemplated by such paragraphs (a) and (b), then the indemnifying party in lieu of indemnification shall contribute to the amount paid or payable by the indemnified party (which, subject to the limitation provided in paragraph (c) next above, shall include legal fees and expenses paid) as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations; (e) the Company and the Shareholders agree that it would not be just and equitable if contribution pursuant to paragraph (d) next above were determined by pro rata allocation or other method of allocation which does not take account of equitable considerations. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any Person not guilty of such misrepresentation. The obligations of the holders of Shares to contribute pursuant to paragraph 6.7(d) are several and not joint; (f) if indemnification is available under this Section 6.7, the indemnifying parties shall indemnify each indemnified party to the full extent provided in paragraphs (a) and (b) hereof without regard to (x) the relative fault of the indemnifying party or indemnified party or (y) any other equitable considerations. 6.8 Rule 144. Once the first Registration Statement filed by the Company under the Act (other than any Registration on Form S-4 or S-8 or any form substituting therefor, or in connection with the Employee Stock Option Plan or to register shares primarily or exclusively for Transfer upon exercise of options pursuant to this Agreement or in connection therewith or for an offering of less than 5% of the common stock equity of the Company) has become effective, the Company will file the reports required to be filed by it pursuant to the Act and the Exchange Act, and the rules and regulations adopted by the Commission thereunder, and will take such further actions as any Shareholder may reasonably request, all to the extent required from time to time to enable such Shareholder (subject, however, to the applicable provisions, if any, of Article II hereof) to effect sales of Shares without registration under the Act within the limitations of the exemption provided by Rule 144, if applicable to the sale of Shares, or any similar rule or regulation hereafter adopted by the Commission. At any reasonable time and upon request of a Shareholder, the Company will deliver to that Shareholder a written statement as to whether it has complied with such informational requirements. Notwithstanding the foregoing, the Company may deregister any class of its equity securities under Section 12 of the Exchange Act or suspend its duty to file reports with respect to any class of its securities pursuant to Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to the provisions of the Exchange Act and the rules and regulations thereunder. 6.9 Participation in Underwritten Registrations. No Shareholder may participate in any underwritten Registration hereunder unless such Shareholder has: (a) agreed to sell its Shares on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to select the underwriter pursuant to Sections 6.1 and 6.2 above; and (b) accurately completed in a timely manner and executed all questionnaires, powers of attorney, underwriting agreements and other documents customarily required under the terms of such underwriting arrangements. 6.10 Other Registration Rights. Except as granted herein to the Shareholders, the Company will not grant any Person (including the Shareholders) any demand or piggyback registration rights with respect to the shares of common stock of the Company (or securities convertible into or exchangeable for, or options to A-45 purchase, shares of common stock of the Company), other than piggyback registration rights that are not inconsistent with the terms of this Article VI. Any right to prior or pro rata inclusion in a Registration Statement with the Shares entitled to the benefits of this Article VI shall be deemed to be inconsistent with the terms of this Article VI. Except as provided in Section 6.1(c), the Company shall not grant to any Person the right to piggyback on a Demand Registration. 6.11 Amendments and Waivers. The provisions of this Article VI, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers of or consents to departures from the provisions hereof may not be given, unless such amendment, modification, supplement, waiver or consent shall have been approved by not less than 2/3 of the members of the Board of Directors. Notwithstanding the foregoing: (a) the provisions regarding Registrations, insofar as such provisions affect the rights of GE Capital and the GE Capital Affiliates, may not be amended, modified, supplemented, waived or departed from without the prior written approval of GE Capital; (b) the provisions regarding Registrations, insofar as such provisions affect the rights of the Management Shareholders and Permitted Transferees, may not be amended, modified, supplemented, waived or departed from without the prior written approval of Management Shareholders and Permitted Transferees holding at least a majority of the Shares then held by all Management Shareholders and their Permitted Transferees; (c) any amendment, modification, supplement, waiver or consent that materially and adversely affects any Group differently from the other Group shall require the prior written approval of the holders of at least a majority of the Shares then held by all members of the Group so affected; (d) an amendment, modification, supplement, waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of holders of Shares whose Shares are being sold pursuant to a Registration Statement, that relates to the Shares being so sold, and that does not directly or indirectly affect the rights of the other holders of Shares or Shares not being so sold, may be given by the holders of a majority of the Shares being sold by such Shareholders; and (e) no amendment, modification, supplement, waiver or consent to the departure from its terms with respect to Section 6.7 shall be effective with respect to any Registration against any holder of Shares who participated in such Registration and is entitled to its protection unless consented to in writing by such holder. 6.12 Inclusion of Vested Shares. Notwithstanding any provision of this Article VI to the contrary, only Shares owned by a Management Shareholder or Permitted Transferee which are Vested Shares may be included in any Registration pursuant to the provisions of this Article VI. 6.13 Exception. Notwithstanding anything to the contrary contained in a separate section of this Agreement, the provisions of this Article VI shall not inure to the benefit of or be applicable to any Management Shareholder who (a) first became party hereto after June 15, 1991 and (b) at the time he seeks to assert any rights hereunder owns less than 10,000 Shares after taking into account the split-up of the Company's common stock on April 2, 1990. ARTICLE VII Restrictive Covenants 7.1 Restrictive Covenants. In consideration of the issuance of Shares to him, each Management Shareholder who is an employee of the Ward Group individually covenants and agrees that: (a) during the time that he is employed by a member of the Ward Group and for a period of three years following the termination of his employment by the Ward Group for any reason whatsoever other A-46 than discharge without Cause (or, in the case of Brennan, during the period commencing on the date hereof and ending on the first to occur of (i) the fifth anniversary of the date hereof, and (ii) the date, if any, on which his employment with the Ward Group has been terminated by the Ward Group without Cause), he shall not directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, any Competing Business in any of the states of the United States or any foreign countries in which any member of the Ward Group was so engaged during the period of his employment and continues to be so engaged at the time of the complained-of act; provided, however, that the Board of Directors, by the affirmative vote of not less than 2/3 of its members, may waive the foregoing provision on behalf of the Company; provided, further, that the foregoing shall not restrict the Management Shareholder's passive ownership of shares of stock of a Person which is engaged in a Competing Business, as long as such Shares are listed on a national securities exchange or traded in the over-the-counter market, such shares are held for investment purposes only, and the Management Shareholder does not own more than 2% of the outstanding shares of stock of such Person; provided, further, that a former Management Shareholder who has become employed by a Person which was not engaged in a Competing Business at the time his employment with such Person commenced shall not be deemed to have become engaged in a Competing Business by virtue of such Person's having acquired a business which is a Competing Business after the time such Management Shareholder's employment with such Person commenced, as long as (x) the Competing Business is not a substantial part of the acquired business, (y) the former Management Shareholder is not involved in the affairs of such acquired business and is not an officer or director of such Person, and (z) the former Management Shareholder is not the owner of 2% or more of the voting securities of such Person; (b) during the time that he is employed by the Ward Group, and thereafter following the termination of his employment by the Ward Group for any reason whatsoever, he will not divulge to persons not employed by the Ward Group or use for his own benefit or the benefit of Persons not employed by the Ward Group, any Confidential Information. 7.2 Limitations on Restrictive Covenants. For the purposes of Section 7.1(b): (a) information which is at any time Confidential Information shall cease to be such, and each Management Shareholder shall thereafter be under no obligations with respect thereto, at such time that: (i) it shall be disclosed by the Ward Group to the public; or (ii) it shall become known by the public other than by reason of the disclosure thereof in violation of applicable confidentiality agreements; and (b) notwithstanding the provisions thereof, nothing contained therein shall be construed to prohibit any Management Shareholder from making any disclosure of information, either to his legal counsel in connection with the defense of any claim, under this Agreement or otherwise, made by any member of the Ward Group, or in connection with the enforcement of any right, under this Agreement or otherwise, existing in favor of the Management Shareholder against any member of the Ward Group, or to any governmental agency to the extent that the Management Shareholder is required by law to do so. 7.3 Return of Documents. Promptly on the termination of his employment with the Ward Group for any reason, each Management Shareholder (or in the event of his death, his personal representative) shall return to the Company any and all copies (whether prepared by himself or by any member of the Ward Group), of books, records, notes, materials, memoranda and other data pertaining to Confidential Information, which are in his possession or control at the time of termination of employment. Each Management Shareholder acknowledges that he does not have, nor can he acquire, any property rights or claims to any of such materials or the underlying data. 7.4 Cooperation. At the request of any member of the Ward Group made at any time or from time to time hereafter, each Management Shareholder, or in the event of his death, his personal representative, shall A-47 make, execute and deliver all applications, papers, assignments, conveyances, instruments or other documents and shall perform or cause to be performed such other lawful acts as any member of the Ward Group may deem necessary or desirable to implement any of the provisions of this Article VII, and he shall give testimony and cooperate with the Ward Group in any controversy or legal proceedings involving any member of the Ward Group. The applicable member of the Ward Group shall reimburse the Management Shareholder for his reasonable expenses which are incurred in connection with the giving of any such testimony. 7.5 Enforcement. Each Management Shareholder agrees and acknowledges that his violation or breach of the covenants contained in this Article VII shall cause the Company irreparable injury and, in addition to any other right or remedy available to the Company at law or in equity, the Company shall be entitled to enforcement by court injunction. Notwithstanding the foregoing sentence, nothing herein shall be construed as prohibiting the Company from also pursuing any other rights, remedies or defenses, for such breach or threatened breach including receiving damages and attorney's fees. In addition to the foregoing, in the event of a breach or violation of this Article VII by a former Type 2 Management Shareholder which occurs after the Company and/or the Designated Management Optionees have purchased the Type 2 Management Shareholder's Shares or those of his Permitted Transferees pursuant to Article III, to the extent that the Purchase Price of the Shares purchased exceeds the Purchase Price which would have been paid if his employment with the Ward Group had been terminated for Cause by reason of a violation of Section 7.1, the Purchase Price shall be reduced to such latter amount, and if at the time the Purchase Price is so reduced the Type 2 Management Shareholder and his Permitted Transferees shall have received payments on account of the Purchase Price which, in the aggregate, exceed the amount to which they would have been entitled by virtue of such reduction, they shall forthwith pay the difference to the purchasers of such Shares. The election of any remedy shall not be construed as a waiver on the part of the Company of any rights it might otherwise have at law or in equity. Said rights and remedies shall be cumulative. 7.6 Survival; Waiver of Offset. The provisions of this Article VII shall survive any termination of this Agreement and shall run and inure to the benefit of the Company, its successors and assigns. Each section of this Article VII shall be construed as an agreement independent of any other provision of this Agreement; and the existence of any claim or cause of action of any Management Shareholder against any member of the Ward Group, whether predicated or based upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of this Article VII. 7.7 Jurisdiction. Each Management Shareholder hereby consents to the personal jurisdiction of the Circuit Court of Cook County, Illinois and to the United States District Court for the Northern District of Illinois, Eastern Division, for any legal proceedings instituted by the Company to enforce any of the covenants or agreements of each Management Shareholder contained in this Article VII, and waives any and all objections which he may have to venue or the issuance of service of process in any such proceedings, or any claim of forum non conveniens. 7.8 Construction. In the event any court shall finally hold that the time or territory or any other provision of this Article VII constitutes an unreasonable restriction against any Management Shareholder, each Management Shareholder agrees that the provisions hereof shall not be rendered void, but shall apply as to such time, territory, and other extent as such court may judicially determine or indicate constitutes a reasonable restriction under the circumstances involved. 7.9 Exception. Notwithstanding anything to the contrary contained in a separate section of this Agreement, the restrictions contained in Section 7.1(a) do not apply to any Person who (i) if his Acquisition Date occurred on or before June 15, 1991, at no time owned 5,000 or more shares after taking into account the split up of the Company's common stock on April 2, 1990, or (ii) if his Acquisition Date occurred after June 15, 1991, at no time owned 25,000 or more shares after taking into account the split up of the Company's common stock on April 2, 1990. A-48 ARTICLE VIII General Matters 8.1 Legend on Certificates. All certificates evidencing Shares (other than certificates of beneficial interest issued by the Voting Trustee under the Voting Trust Agreement and Shares purchased in a sale registered pursuant to an effective registration statement) shall bear the following legend: "The sale, transfer and encumbrance of the shares represented by this Certificate are subject to a certain Stockholders Agreement among the corporation and its shareholders, dated as of June 17, 1988. A copy of said Agreement is on file in the office of the Secretary of the corporation. No sale or other transfer of the shares represented by this Certificate may be effected except pursuant to the terms of said Agreement. In addition, the shares represented by this Certificate have not been registered under the Securities Act of 1933, as amended. The shares represented by this Certificate may not be sold or transferred in the absence of an effective Registration Statement for the shares under the Securities Act of 1933 or pursuant to an applicable exemption from registration. In connection with any proposed sale or transfer of the shares pursuant to an exemption from registration, the holder of the shares represented by this Certificate may be required to deliver to the corporation an opinion of counsel satisfactory to the corporation, or the corporation may require that it shall have received an opinion of its counsel, that registration under said Act is not required. In addition, the right to vote the shares represented by this certificate is restricted in the manner provided in said Agreement. The corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof authorized to be issued by the corporation and the qualifications, limitations or restrictions of such preferences and/or rights." All certificates evidencing Shares purchased in a sale registered pursuant to an effective registration statement (other than certificates of beneficial ownership issued by the Voting Trustee under the Voting Trust Agreement) shall bear the following legend: "The sale, transfer and encumbrance of the shares represented by this Certificate are subject to a certain Stockholders Agreement among the corporation and its shareholders, dated as of June 17, 1988. A copy of said Agreement is on file in the office of the Secretary of the corporation. No sale or other transfer of the shares represented by this Certificate may be effected except pursuant to the terms of said Agreement. In addition, the right to vote the shares represented by this certificate is restricted in the manner provided in said Agreement. The corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof authorized to be issued by the corporation and the qualifications, limitations or restrictions of such preferences and/or rights." Should the certificates evidencing Shares purchased in a sale registered pursuant to an effective registration statement be subject to a Voting Trust Agreement other than the June 20, 1988 Voting Trust Agreement, the date in the immediately above legend shall be modified to reflect the date of the applicable Voting Trust Agreement. Upon termination of this Agreement, certificates for Shares (other than certificates of beneficial interest issued by the Voting Trustee pursuant to the Voting Trust Agreement) may be surrendered to the Company in exchange for new certificates without the foregoing legend, but, if necessary, said new certificates shall bear that portion of the foregoing legend which relates to compliance with the Act. 8.2 Termination and Amendment of Agreement. This Agreement shall be terminated: (a) by the Company with the approval of the Board of Directors and with the written consent of the holders of not less than 66 2/3% of the outstanding Shares of each class, acting separately as a class; (b) upon a sale by the Ward Group of all or substantially all of their aggregate assets (other than an intercompany sale within the Ward Group), to a single purchaser or a related group of purchasers in a single transaction or a related series of transactions; A-49 (c) upon a merger or consolidation of the Company as a result of which the Shareholders' percentage of ownership of the surviving or resulting entity is less than 50% of their percentage of ownership of the Company immediately prior to such merger or consolidation; or (d) upon a sale, to a single purchaser or a related group of purchasers, in a single transaction or a related series of transactions, of not less than 66 2/3% of the outstanding shares of common stock of the Company of each class. Termination of this Agreement shall not affect any rights or obligations which arose prior to termination, nor shall it terminate Article VI or Article VII. Except as otherwise provided in Section 6.11 and in the following sentence, this Agreement may be amended by the Company with the consent of the holders of not less than 66 2/3% of the outstanding Shares of each class, acting separately as a class, but no such amendment shall adversely affect the method of valuation of any Management Shareholder's Shares for the purposes of Article III without his specific consent. From and after the date on which the number of members of the Board of Directors which GE Capital has the right to designate pursuant to Section 5.2 has been reduced pursuant to paragraph (b) or (c) thereof, Section 5.3, and the conforming provisions of the By-laws of the Company, may be amended or terminated in whole or in part from time to time, upon the affirmative vote or consent of (x) a majority of the members of the Board of Directors and (y) the holders of a majority of the then outstanding Class A Shares. As long as the Voting Trust Agreement is in effect, the Voting Trustee, and once the Voting Trust Agreement is no longer in effect, the Designator, shall have the power, as attorney in fact, to act for each of the Management Shareholders and each Permitted Transferee in connection with the termination, or any amendment or restatement, of this Agreement which has been authorized by the Shareholders as provided in this Section 8.2. Said power shall be deemed to be coupled with an interest and shall be irrevocable. 8.3 Termination of Status as Management Shareholder. From and after the date that a Management Shareholder ceases to own any Shares, except for the provisions of Article VII, he shall no longer be deemed to be a Management Shareholder for purposes of this Agreement and all rights he may have hereunder (including, without limitation, the right to exercise any option herein granted) shall terminate. For the purposes of this Section 8.3, a Management Shareholder shall be deemed to own all Shares owned by his Permitted Transferees. 8.4 Not an Employment Agreement. Nothing contained in this Agreement shall be deemed or construed as creating any agreement of employment between a Management Shareholder and any member of the Ward Group or a right of any Management Shareholder to employment by any member of the Ward Group. 8.5 Indemnification. Concurrently herewith, the Company shall (and will cause Ward to) enter into an indemnification agreement in the form of Exhibit A hereto, with the Indemnitees. 8.6 Notices. All notices required hereunder shall be in writing and shall be deemed served when delivered personally to the person for whom intended or sent by confirmed facsimile, or two days after deposit in the United States Mail, certified mail, return receipt requested, addressed to the persons for whom intended at the following respective addresses: The Company: Montgomery Ward Plaza Chicago, IL 60671-0042 Attention: President Any Management Shareholder, Permitted Transferee or GE Capital Affiliate, as the case may be: at the last known address of said Management Shareholder, Permitted Transferee or GE A-50 Capital Affiliate, as the case may be, as disclosed by the books and records of the Company; GE Capital: 260 Long Ridge Road Stamford, CT 06902 Attention: General Manager, Corporate Finance Group with a copy to: Associate General Counsel, Corporate Finance Group at the same address and/or to such other persons and/or at such other addresses as may be designated by written notice served in accordance with the provisions hereof. 8.7 Miscellaneous. The use of the singular or plural or masculine, feminine or neuter gender shall not be given an exclusionary meaning and, where applicable, shall be intended to include the appropriate number or gender, as the case may be. 8.8 Counterparts. This Agreement may be executed in counterparts. Each of such counterparts shall be deemed to be an original and all of such counterparts, when taken together, shall constitute a single instrument. 8.9 Descriptive Headings. Title headings are for reference purposes only and shall have no interpretative effect. 8.10 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. Any amendments to this Agreement must be made in writing and duly executed by each of the parties entitled to adopt said amendment or by an authorized representative or agent of each such party, all as provided in Section 8.2. 8.11 Waivers. No action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as waiver of any preceding or succeeding breach and no failure by any party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. The preceding sentence shall not apply to the failure of a party to exercise a specific option granted to that party pursuant to the terms of this Agreement within the period of time provided herein. Any waiver shall be in writing, signed by the waiving party. 8.12 Binding Effect; Enforcement. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their heirs, representatives, successors and permitted assigns. Each Shareholder agrees and acknowledges that its breach of any of the provisions contained in this Agreement would cause irreparable injury and that monetary damages would be inadequate. Accordingly, each Shareholder agrees that, in addition to all other legal rights and remedies, the aggrieved party shall be entitled to specific performance of the rights granted to it under this Agreement. 8.13 Applicable Law. This Agreement shall be governed as to validity, construction and in all other respects by the internal laws of the State of Delaware. 8.14 Severability. The invalidity of any provision of this Agreement or portion of a provision shall not affect the validity of any other provision of this Agreement or the remaining portion of the applicable provision. A-51 8.15 Resolution of Certain Ambiguities and Conflicts. In the event of any ambiguity or conflict in this Agreement (i) with respect to whether any particular Shares constitute Vested Shares, (ii) the Percentage of Vesting applicable thereto, or (iii) the application of the provisions of Article III to any particular Management Shareholder and his Permitted Transferees, the ambiguity or conflict shall be resolved by the Designator in his sole discretion. 8.16 Joinder by Brennan. In addition to executing this Agreement in his individual capacity, Brennan (i) accepts his appointment herein as the Designator, and (ii) in his capacity as Voting Trustee, agrees to vote all Shares which are subject to the Voting Trust Agreement in the manner provided in Article V. 8.17 Authority to Give Consents, Approvals, etc. As long as the Voting Trust Agreement shall be in effect, any votes, approvals, waivers or consents of Shareholders whose Shares are subject to the Voting Trust Agreement shall be made by the Voting Trustee, rather than the beneficial owners of such Shares, except that for the purposes of Sections 6.11(d) and (e) and Section 8.2(a), the beneficial owner of such Shares, rather than the Voting Trustee, shall be the Person to give such approval, waiver or consent. A-52 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. BFB ACQUISITION CORP. GENERAL ELECTRIC CAPITAL CORPORATION By: _________________________________ By: _______________________________ Title: ______________________________ Title: ____________________________ _____________________________________ Bernard F. Brennan Type 1 Management Shareholder, Designator and Voting Trustee The undersigned hereby executes a counterpart of this Agreement, is hereby made a party to this Agreement, and joins in and agrees to be bound by the provisions of this Agreement as a (Type 1 Management Shareholder) (Type 2 Management Shareholder) (Permitted Transferee) (GE Capital Affiliate) (strike three). _____________________________________ Signature _____________________________________ Printed name _____________________________________ Street address _____________________________________ City, state, zip code A-53 SCHEDULE A AND EXHIBIT A INTENTIONALLY OMITTED EXHIBIT B FORM OF NON-NEGOTIABLE SECURED PROMISSORY INSTALLMENT NOTE $ , 19 Chicago, Illinois FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises to pay to ("Payee"), the principal sum of Dollars and Cents ($ ), subject to Payee's continued compliance with the restrictive covenants set forth in Article VII of the Stockholders' Agreement (as defined herein), including without limitation, Sections 7.1, 7.3 and 7.5 thereof, in each case to the extent applicable by their terms. The balance of principal from time to time outstanding and unpaid hereunder shall bear interest from the date hereof at the rate of % per annum. The balance of principal shall be payable in five (5) equal annual installments of $ each on the first through fifth anniversaries, both inclusive, of the Article III Closing Date (as defined in that certain Stockholders' Agreement dated as of June 17, 1988, as heretofore amended and restated, hereinafter referred to as the "Stockholders' Agreement"), such that the first installment is due and payable on , 19 , the second installment is due and payable on , 19 , the third installment is due and payable on , 19 , the fourth installment is due and payable on , 19 , and the final installment is due and payable on , 19 . Accrued interest on the principal sum shall be paid at the times above provided for payment of principal. Payee has sold shares of Class A Common Stock (the "Shares") of Montgomery Ward Holding Corp., a Delaware corporation (the "Company"), to Maker pursuant to Article III of the Stockholders' Agreement and the purchase price for such Shares has been paid, in part, through delivery of this Note to Payee. All payments on account of the indebtedness evidenced by this Note shall be applied first to accrued and unpaid interest and the remainder to principal. Payments shall be made to Payee at , or such other place as Payee may from time to time designate in writing to Maker. This Note is secured by a Pledge and Escrow Agreement of even date herewith (the "Pledge Agreement") between Maker, as Pledgor thereunder, and Payee, as Pledgee thereunder. The unpaid principal balance may be prepaid, in whole or in part, at any time from time to time, without penalty or premium and without notice to Payee. All prepayments shall be applied against installments coming due in the inverse order of their maturity. The obligations hereunder are subordinated to all other indebtedness of Maker to the extent provided in, and are subject to the provisions of, Article IV of the Stockholders' Agreement. By way of clarification, and not limitation, Payee shall be entitled to the benefits of Section 4.3 of the Stockholders' Agreement. It shall constitute an "Event of Default" hereunder: (a) if Maker shall fail to pay any payment of principal or interest when due hereunder within thirty (30) days from the date written notice from the Payee of such default is received by Maker; provided, however, that the foregoing clause shall not apply in the event that Maker does not make all or any portion of such payment in accordance with Article IV of the Stockholders' Agreement, in which event Maker shall provide notice that the limitations imposed by Article IV are in effect, prior to the expiration of such thirty (30) day period, or (b) if an Event of Default by Maker shall occur under the Pledge Agreement, as the same may be amended from time to time. If an Event of Default shall occur hereunder, Payee, at its option and without notice to Maker, may declare the unpaid principal balance, together with accrued interest thereon, immediately due and payable. This Note is secured by, and entitled to the benefits of, the Pledge Agreement, whereby Maker has pledged to Payee voting trust certificates representing shares of Class A Common Stock (the "Collateral") of the Company to secure Maker's obligations to Payee hereunder. Maker agrees to pay all reasonable expenses incurred by Payee in the enforcing or endeavoring to enforce this Note and in connection with any litigation involving Payee as a result of the security interest held by Payee. Payee shall be entitled to receive payment in full of all interest accruing hereon subsequent to the filing of a petition or the taking of any other action commencing a bankruptcy, reorganization arrangement or other similar proceeding or which would accrue but for such proceeding or action. No delay or omission on the part of Payee in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Maker hereby expressly waives presentment for payment, acceptance, notice of dishonor, protest and notice of protest. Maker represents and agrees that the indebtedness evidenced by this Note has been incurred for business purposes and constitutes a business loan within the meaning of 815 Illinois Compiled Statutes Section 205/4(1)(c). Any notice given hereunder shall be in accordance with the notice provisions provided under the Pledge Agreement and shall be deemed given when given in accordance with those provisions. This Note has been delivered at Chicago, Illinois and shall be governed by and construed in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, Maker has caused this Note to be executed as of the day and year first above written. Maker: MONTGOMERY WARD HOLDING CORP. By: _________________________________ Chief Financial Officer ANNEX 2 VOTING TRUST AGREEMENT This VOTING TRUST AGREEMENT ("Agreement") is entered into as of June 21, 1988, by and among BFB ACQUISITION CORP., a Delaware corporation (the "Company"); BERNARD F. BRENNAN, as the voting trustee (in such capacity and with his successor(s) being hereinafter referred to as the "Voting Trustee"); and the Company stockholders who are parties hereto (hereinafter referred to individually as a "Stockholder" and collectively as the "Stockholders"), as identified and listed on a certificate attested to by the Secretary of the Company and maintained with the permanent records of the Company (the "Certificate"). RECITALS A. The Stockholders are the record and beneficial owners of the number of shares of class A common stock, series 1, par value $0.01 per share, of the Company, as are set forth on the Certificate; B. The Company presently contemplates hereafter issuing shares of class A common stock, series 2, par value $0.01 per share, of the Company to stockholders who will hereafter become parties to this Agreement. The common stock, series 1 and series 2, of the Company, will herein sometimes be referred to collectively as the "Class A Common Stock" and the shares (whether series 1 or series 2) of the Class A Common Stock will herein sometimes be referred to as the "Shares"; C. BFB Merger Sub Corp., a Delaware corporation and a direct wholly owned subsidiary of the Company ("Merger Corp."); the Company; and Montgomery Ward & Co., Incorporated, an Illinois corporation ("Wards"), have entered into a Plan and Agreement of Merger, dated as of June 23, 1988, providing, among other things, for the merger of Merger Corp. with and into Wards; and D. The Voting Trustee and the Stockholders deem it necessary and advisable to deposit the Shares with the Voting Trustee on the terms and conditions hereinafter set forth in order to assure that the holders of the Shares vote with a single voice with respect to all matters submitted to the vote of stockholders of the Company. AGREEMENTS NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Filing of Agreement with the Company; Availability for Inspection by Stockholders. Copies of counterparts of this Agreement, signed by all the Stockholders by their attorney-in-fact, and of every agreement supplemental to this Agreement or amending this Agreement, shall be filed in the principal office of the Company, which currently is located at One Montgomery Ward Plaza, Chicago, Illinois 60671-0042 and in the registered office of the Company in the State of Delaware, and shall be open to the reasonable inspection of any Stockholder of the Company or beneficiary of the trust under this Agreement. The "Voting Trust Certificates" (as defined in Section 3) issued as provided in this Agreement shall be issued, received and held subject to all of the terms of this Agreement and the respective Subscription Agreements executed by the Stockholders pursuant to which such Stockholders acquired their Shares and a certain Stockholders Agreement dated as of June 17, 1988 executed by the Stockholders by their attorney-in-fact ("Stockholders Agreement"). 2. Transfer of Shares. (a) Each of the Stockholders, simultaneously with the "Closing" (as defined in the Confidential Private Placement Memorandum referred to in the Subscription Agreement to which such Stockholder is a party), is depositing or causing to be deposited with the Voting Trustee (or with a national bank or other bank with capital of at least $100,000,000 designated by the Voting Trustee, from time to time B-1 (the "Custodian")) such Stockholder's Shares by delivery to the Voting Trustee (or Custodian, if any) of a certificate (or certificates) representing the Shares owned by such Stockholder, together with appropriate stock powers transferring such certificate(s) to the Voting Trustee, with any requisite stock transfer stamps annexed thereto. The Stockholders and the Voting Trustee (or Custodian, if any) shall take such action as is necessary to effect the transfer of the Shares to, and in the name of, the Voting Trustee on the books of the Company, including the immediate filing of this Agreement with the Secretary of the Company. The certificate(s) for Shares so transferred and delivered to the Voting Trustee pursuant to this Agreement shall be surrendered by the Voting Trustee to the Company's treasurer or transfer agent, if any, and cancelled, and a new certificate (or certificates) therefor shall be issued to and held by the Voting Trustee in the name of "Bernard F. Brennan, as Voting Trustee". Upon receipt by the Voting Trustee of the certificate(s) for Shares and upon the transfer of the Shares into the name of the Voting Trustee, the Voting Trustee shall hold the Shares, as stockholder of record, subject to the terms and conditions of this Agreement. (b) The Voting Trustee may designate a Custodian to act for and on behalf of the Voting Trustee under this Agreement. If a Custodian is designated by the Voting Trustee, such person shall be empowered, at the direction of the Voting Trustee acting in any manner consistent with this Agreement, to deal with Shares and Voting Trust Certificates on the Voting Trustee's behalf as if the Custodian were the Voting Trustee. The Custodian's actions taken pursuant to this Agreement, in accordance with the Voting Trustee's instructions consistent with this Agreement, shall be deemed to be those of the Voting Trustee. 3. Issuance of Voting Trust Certificates. Promptly after the Closing, the Voting Trustee shall issue or cause to be issued by the Custodian, if any, to each Stockholder, in exchange for the Shares delivered by him or her pursuant to this Agreement, a Voting Trust Certificate(s) substantially in the form annexed as Exhibit A hereto (the "Voting Trust Certificate(s)"), representing in the aggregate the number of Shares delivered by the respective Stockholder. Except as otherwise provided in this Agreement (including, without limitation, Section 5), all options, rights of purchase, and other powers and privileges affecting the Shares represented by the Voting Trust Certificates (including, without limitation, those provided for in the Subscription Agreement and those provided in the Stockholders Agreement) shall attach to the Voting Trust Certificates issued pursuant to this Agreement which represent the Shares. 4. Authority of Voting Trustee to Vote the Shares, Enter Into Agreements. (a) The Voting Trustee shall hold the Shares transferred to him pursuant to Sections 2, 5 and 12 of this Agreement under the terms and conditions set forth in this Agreement. As long as any of the Shares are subject to this Agreement and until the actual delivery by the Voting Trustee (or Custodian, if any), to the stockholders owning such Shares, of stock certificates in exchange for Voting Trust Certificates, pursuant to Section 11(b) of this Agreement, the Voting Trustee shall have full power and authority, and is hereby fully and exclusively empowered and authorized, to vote in person or by proxy the Shares deposited pursuant to this Agreement and transferred to him (including any changed or additional Shares, as provided in Section 5) at all meetings of the stockholders of the Company or to give written consents in lieu of voting such Shares in respect of any and all matters on which Shares are entitled to vote, including without limitation, the election of directors. (b) The Voting Trustee's power to vote such Shares and give consents in respect thereof pursuant to this Agreement shall be irrevocable for the term of this Agreement. The Voting Trustee shall have the right to waive notice of any meeting of stockholders of the Company in respect of such Shares. The Voting Trustee may exercise any power or perform any act pursuant to this Agreement by an agent or attorney duly authorized and appointed by him. (c) The Voting Trustee shall have full power and authority to execute, deliver and perform the Stockholders Agreement and enter into any amendments with respect thereto without notice to the Stockholders. B-2 (d) Nothing contained in this Agreement shall disqualify the Voting Trustee or successor trustees from serving as such if the Voting Trustee does any of the following, nor shall anyone serving in such capacity be incapacitated from doing any of the following: (i) dealing or contracting with the Company or any of its affiliates, either as a vendor, purchaser, or otherwise, nor shall any transaction or contract be affected or invalidated by reason of the fact that the Voting Trustee or any firm or corporation affiliated with the Voting Trustee is in any way interested in such transaction or contract; nor shall the Voting Trustee be liable to account to the Company or to any stockholder thereof for any profits realized by, from or through any transaction or contract by reason of the fact that the Voting Trustee or any firm or corporation affiliated with the Voting Trustee is interested in such transaction or contract; or (ii) serving the Company or any of its affiliates as an officer or director, or in any other capacity, and receiving compensation therefor. (e) Anything elsewhere in this Agreement to the contrary notwithstanding, the holders of Voting Trust Certificates, and not the Voting Trustee, shall have the exclusive right to approve, waive or consent to the matters referred to in Sections 6.11(d), 6.11(e) and 8.2(a) of the Stockholders Agreement. 5. Receipt of Additional Stock Certificates. (a) If the Voting Trustee shall receive any shares of the Company or any successor or successors of the Company issued by way of dividend, split-up, recapitalization, reorganization, merger, consolidation, or any other change or adjustment in respect of the Shares held by him pursuant to this Agreement, the Voting Trustee (or Custodian, if any) shall hold the stock certificates representing such additional or changed shares, to the extent that such shares have voting rights (including voting rights contingent upon the occurrence of specified events), subject to the terms of this Agreement and shall issue, or cause to be issued by the Custodian, if any, Voting Trust Certificates representing such changed or additional stock certificates to the respective holders of the then outstanding Voting Trust Certificates entitled thereto. Any stock certificates of the Company or any successor or successors of the Company issued to the Voting Trustee with respect to the Shares that are subject to this Agreement which do not have any such voting rights shall be delivered to the respective registered holders of the then outstanding Voting Trust Certificates in proportion to the number of Shares respectively represented by the Voting Trust Certificates. (b) The term "Shares", as used in this Agreement, shall, without limiting the generality of anything elsewhere herein contained, include, in addition to the Shares originally deposited with the Voting Trustee, all additional shares of the Company or any successor or successors of the Company deposited with the Voting Trustee, pursuant to Section 5(a) or retained by the Voting Trustee pursuant to Section 7. 6. Dividends and Distributions. Except as otherwise provided in Section 5, if the Company shall pay dividends or any distribution on or in respect of the Shares, it shall pay the same to the Voting Trustee, who shall promptly distribute, or cause the distribution to be made by the Custodian (if any) of, the same among the holders of record of then outstanding Voting Trust Certificates in proportion to the number of Shares in respect of which the dividends are paid or distribution is made, which are respectively represented by their Voting Trust Certificates. 7. Subscription for Securities of the Company. In case any shares or other securities of the Company are offered for subscription to the holders of the Shares, the Voting Trustee (or Custodian, if any), promptly upon receipt of notice of such offer, shall mail a copy thereof to each holder of Voting Trust Certificates. Upon actual receipt (any deemed receipt in accordance with Section 13 notwithstanding) by the Voting Trustee, prior to the last day fixed by the Company for subscription and payment, of a request so to subscribe from such holder accompanied by the requisite sum of money and appropriate form required to subscribe for such shares or securities, the Voting Trustee shall make, or cause to be made, such subscription and payment. If the shares or other securities so subscribed for are voting securities of the Company, the certificates therefor shall be issued and held by the Voting Trustee (or Custodian, if any), as stockholder of record, subject to the terms and conditions of this Agreement and the Voting Trustee shall issue or cause to be issued by the Custodian, if any, to the subscribing holder a Voting Trust Certificate in respect thereof. If the shares or B-3 other securities so subscribed for are non-voting securities of the Company, the certificates therefor shall be issued to the subscribing holder and the Voting Trustee shall mail or deliver such certificates or, cause them to be mailed and delivered by the Custodian, if any, to such holder. 8. No Compensation; Expenses. The Voting Trustee shall serve without compensation, but shall be entitled to reimbursement as set forth in this Agreement for expenses and charges which may be incurred as Voting Trustee, including but not limited to the employment of the Custodian, if any, and such agents, attorneys and counsel as the Voting Trustee may deem necessary and proper for the carrying out of this Agreement, and all taxes or other governmental charges paid or incurred as a result of the transfer or issuance of any Class A Common Stock or Voting Trust Certificates or in respect of the ownership of the Class A Common Stock held as trustee or in respect of any dividends, distributions or other rights in respect of such stock. Any such charges or expenses incurred shall be promptly reimbursed to the Voting Trustee by the Company and the Voting Trustee shall have a first lien on any and all distributions in respect of the Shares to secure the Voting Trustee's rights to such reimbursements. 9. Exculpation; Indemnification of Voting Trustee. The Voting Trustee shall not be liable by reason of any matter arising out of or in relation to this Agreement, except for such loss or damage as the holders of Voting Trust Certificates may suffer by reason of the Voting Trustee's willful misconduct, and, without limiting the generality of the foregoing, the Voting Trustee shall not be liable for any action taken, or omitted to be taken, by him in reliance upon and in conformity with, the advice of counsel, or by reason of any error of judgment or mistake of law or other mistake, or for any act or omission of any agent or attorney, or for any misconstruction of this Agreement, or for any action of any sort taken or omitted thereunder or believed by the Voting Trustee to be in accordance with the provisions and intents hereof or otherwise. The Voting Trustee shall be indemnified and held harmless by the Company from and against any and all of the Voting Trustee's actions pursuant to this Agreement, except for such Voting Trustee's willful misconduct. The Voting Trustee shall not be required to give a bond or other security for the faithful performance of his duties as such and shall be entitled to receive prompt payments in respect of the indemnification provided by this Agreement in advance of the final adjudication of any disputes relating thereto. 10. Successor Voting Trustee. (a) So long as Bernard F. Brennan shall be a "Management Shareholder" (as defined in the Stockholders Agreement), of the Company, he shall be the Voting Trustee. (b) For the purposes of this paragraph (b), all references to ownership of Shares shall include the legal and beneficial ownership of Shares held in the Voting Trust and a Stockholder shall be so deemed to own as well all Shares owned by his "Permitted Transferees" (as defined in the Stockholders Agreement). If any of the following events occurs with respect to Bernard F. Brennan (each of such events being herein sometimes referred to as a "Terminating Event"): he shall (i) cease to be a Management Shareholder, (ii) die, (iii) resign as Voting Trustee, or (iv) be adjudicated incompetent, then, upon the occurrence of such Terminating Event, the Management Shareholder, who, from time to time, after the occurrence of the Terminating Event, is both the owner of the largest number of Shares and an employee of the "Wards Group" (as such term is defined in the Stockholders Agreement), shall be the successor Voting Trustee; provided, however, that after the first anniversary of the date of such Terminating Event, the successor Voting Trustee shall consist of a committee comprised of said Management Shareholder and the two most senior officers, from time to time, (other than said Management Shareholder) of Wards who are also Management Shareholders. Said committee shall act by the vote of a majority of its members. So long as Bernard F. Brennan is serving as the Voting Trustee, he may, at any time or from time to time, rescind, alter or amend, in whole or in part, any or all of the provisions of this paragraph by written notice to the Stockholders. Such rescissions, alterations or amendments shall remain in force until the termination of this Agreement or for such shorter period or periods as Bernard F. Brennan shall state in such notice or any subsequent notice or notices served while he is serving as Voting Trustee. (c) The rights, powers, privileges and obligations of the Voting Trustee acting as such pursuant to this Agreement shall be possessed by any successor Voting Trustee with the same effect as though such B-4 successor had originally been a party to this Agreement. The words "Voting Trustee" as used in this Agreement mean the Voting Trustee or any successor Voting Trustee acting under this Agreement. 11. Termination. (a) The Voting Trust created by this Agreement shall be effective and remain in force until the occurrence of the earliest of the following events: (i) the tenth anniversary of the date of this Agreement; (ii) the election of the Voting Trustee to terminate this Agreement by written notice to the holders of Voting Trust Certificates at any time after the date of this Agreement; or (iii) if there shall be no Voting Trustee in office, the failure of a successor Voting Trustee to be designated as provided in this Agreement or to serve for a period of 120 consecutive days. (b) Upon the termination of the Voting Trust with respect to any or all of the Shares (it being understood that a termination with respect to some Shares shall not terminate the Voting Trust with respect to other Shares), the Voting Trustee shall in exchange for, and upon the surrender of, the Voting Trust Certificates representing such Shares, deliver or cause to be delivered by the Custodian, if any, stock certificates to the holder of such Voting Trust Certificates. (c) If, in the event of the bankruptcy, receivership, dissolution or total or partial liquidation of the Company, whether voluntary or involuntary, the Voting Trustee shall receive any monies, securities and property to which the respective registered holders of the then outstanding Voting Trust Certificates shall be entitled, the Voting Trustee shall distribute or cause the distribution to be made by the Custodian, if any, of such monies, securities and property to the respective registered holders of the then outstanding Voting Trust Certificates in proportion to the number of Shares respectively represented by their Voting Trust Certificates. (d) The death, disability or incompetency of a holder of a Voting Trust Certificate during the term of this Agreement shall in no way affect the validity or enforceability of this Agreement or the Voting Trust Certificates issued pursuant to this Agreement, which shall remain in full force and effect. (e) If the Company shall acquire any Voting Trust Certificates, the Company may thereupon, at its option, deliver such Voting Trust Certificates to the Voting Trustee (or Custodian, if any) and shall receive in exchange the Common Stock or other securities represented by such Voting Trust Certificates. Upon such exchange the Voting Trust Certificates so delivered shall be cancelled. Any Voting Trust Certificates held by the Company shall not be deemed to be outstanding. 12. Additional Parties. If any person who is not a Stockholder shall acquire Class A Common Stock of record who desires, or who is required as a condition to such acquisition, to enter into and become a party to this Agreement, the parties to this Agreement hereby agree that such person, upon execution of a counterpart to this Agreement, shall become a party to this Agreement and be deemed to be a Stockholder for all purposes of this Agreement as if such person had originally executed this Agreement, and the Voting Trust herein created shall continue to remain in effect. 13. Notices. All notices, statements, instructions or other documents required to be given in accordance with this Agreement, shall be in writing and shall be given either personally or by mailing the same in a sealed envelope, first-class mail postage prepaid and either registered or certified, return receipt requested, addressed to, or sent by telegram, telex, confirmed telecopy or similar form of confirmed telecommunication (with a copy to follow by mail): If to the Voting Trustee: Bernard F. Brennan c/o BFB Acquisition Corp. One Montgomery Ward Plaza Chicago, Illinois 60671-0042; B-5 if a Custodian has been appointed and is serving, and the holders of Voting Trust Certificates have been so notified, then a copy is to be sent to the Custodian at the address provided in such notice; and if to the holders of the Voting Trust Certificates, at their respective addresses as shown on the records of the Voting Trustee (or Custodian, if any) or to such other addresses as a holder or the Voting Trustee shall designate pursuant to notice in the manner set forth in this Agreement. Notices sent by mail shall be deemed served on the second day after being deposited in the mail. Notices sent by other means in accordance with this Section 13 shall be deemed served upon receipt. Notices to be sent to a successor Voting Trustee shall be sent to the person and at the address designated by notice served in the manner herein provided. 14. Maintenance of Certificate. The Company shall from time to time make such amendments to the Certificate as shall be necessary. 15. Entire Agreement. This Agreement constitutes the entire understanding among the parties to this Agreement with respect to the subject matter of this Agreement and no modification, amendment or waiver of any provision of this Agreement shall be valid unless in writing signed by the Voting Trustee and holders of Voting Trust Certificates representing the beneficial interest in a majority of the shares of Class A Common Stock constituting Shares under this Agreement. 16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective heirs, executors, administrators and permitted successors and assigns. 17. Governing Law. Regardless of the place of execution, this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (without regard to Delaware's conflicts of laws principles). Each Stockholder agrees to submit to personal jurisdiction and to waive any objection as to venue of federal courts in the Northern District of Illinois or state courts in the County of Cook, State of Illinois. Service of process on a Stockholder or Stockholders in any action arising out of or relating to this Agreement shall be effective if served upon such Stockholder or Stockholders by mail in accordance with Section 13. 18. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 19. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. THE COMPANY: BFB ACQUISITION CORP. By: _________________________________ Bernard F. Brennan, President VOTING TRUSTEE: ------------------------------------- Bernard F. Brennan STOCKHOLDERS: ------------------------------------- Bernard F. Brennan, as attorney-in- fact for each Person named in the Certificate B-6 EXHIBIT A VOTING TRUST CERTIFICATE FOR SHARES OF CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF BFB ACQUISITION CORP., A DELAWARE CORPORATION No. of Shares Certificate No. Series THIS IS TO CERTIFY THAT, on June 21, 1998 or upon the prior termination of a certain Voting Trust Agreement, dated June 21, 1988, by and among BFB Acquisition Corp.; Bernard F. Brennan, as Voting Trustee; and certain class A common stockholders of BFB Acquisition Corp., pursuant to which agreement this certificate has been issued, will be entitled to receive certificates, expressed to be fully-paid and non-assessable, for the number of shares, and of the series, hereinabove specified (the "Shares") and for the duration of such Voting Trust Agreement, to receive distributions equal to the cash or property or nonvoting stock distributions, if any, collected by the Voting Trustee (or Custodian, if any) upon a like number of the Shares standing in the name of the Voting Trustee. Prior to the actual delivery of such certificates, the Voting Trustee (or Custodian, if any), with respect to any and all of the Shares shall possess and be entitled to exercise, in the manner and to the extent provided in the aforesaid Voting Trust Agreement, all of the rights of every kind of the holder of this certificate, including the right to vote and take part in, or to consent to any corporate or stockholders' action, it being expressly stipulated that no right to vote, or take part in, or to consent to any corporate or stockholders' action, shall pass by, or under, this certificate. This certificate is not valid unless signed by the Voting Trustee or the appointed Custodian. The holder hereof, by accepting this certificate, manifests his consent that the undersigned Voting Trustee may treat the registered holder hereof as the true owner for all purposes, except the delivery of certificates for Shares, which delivery shall not be made without the surrender hereof. IN WITNESS WHEREOF, the undersigned, the Voting Trustee, has caused this certificate to be signed as of the day of June, 1988. VOTING TRUSTEE: _____________________________________ Bernard F. Brennan CUSTODIAN: [ _________________________________ ] By: _________________________________ Title: ______________________________ B-7 The sale, assignment, transfer, pledge, hypothecation or other encumbrance of this Voting Trust Certificate or the Class A Common Stock (or any interest therein) represented hereby is subject to the restrictions, terms and conditions set forth in the Voting Trust Agreement described in this Certificate and pursuant to which this Certificate is issued, to a Subscription Agreement, dated as of June 14, 1988, and a certain Stockholders Agreement among the corporation, its shareholders and holders of Voting Trust Certificates, dated June 17, 1988. A copy of said Stockholders Agreement is on file in the office of the Secretary of the corporation. No sale, assignment, transfer, pledge, hypothecation or other encumbrance of this Certificate, or the shares of Class A Common Stock represented by this Certificate, may be effected, except pursuant to the terms of said Stockholders Agreement. In addition, this Certificate and/or the shares of Class A Common Stock represented by this Certificate, as the case may be, may not be sold or transferred in the absence of an effective Registration Statement (for the interest in the Voting Trust represented by this Certificate or said shares of Class A Common Stock represented hereby, as the case may be) under the Securities Act of 1933 or pursuant to an applicable exemption from registration. In connection with any proposed sale or transfer of this Certificate, or the shares of Class A Common Stock represented hereby, as the case may be, pursuant to an exemption from registration, the holder of this Certificate, or shares of Class A Common Stock represented by this Certificate, as the case may be, may be required to deliver to the corporation an opinion of counsel satisfactory to the corporation, or the corporation may require that it shall have received an opinion of its counsel, that registration under said Act is not required. In addition, the right to vote the shares of Class A Common Stock represented by this Certificate is restricted in the manner provided in said Stockholders Agreement. ASSIGNMENT FOR VALUE RECEIVED, does hereby sell, assign and transfer unto all of the undersigned's right, title and interest in and to this Voting Trust Certificate, and does hereby irrevocably constitute and appoint to be the undersigned's attorney to transfer this Voting Trust Certificate on the books of the within named Voting Trustee, with full power of substitution in the premises. Dated: __________________________ _____________________________________ Transferor's signature IN PRESENCE OF ______________________ Witness' signature Print name of witness: B-8 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA- TION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SO- LICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JU- RISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICI- TATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 3 Prospectus Summary........................................................ 4 Summary Financial Information............................................. 13 The Company............................................................... 14 Risk Factors.............................................................. 14 The Stockholders' Agreement............................................... 18 Certain Federal Income Tax Aspects........................................ 26 Use of Proceeds........................................................... 28 Dividends................................................................. 28 The Voting Trust Agreement................................................ 29 Selected Financial Data................................................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 33 Business.................................................................. 38 Properties................................................................ 44 Management................................................................ 46 Selling Shareholders...................................................... 57 Principal Shareholders.................................................... 57 Description of Equity Securities.......................................... 59 Determination of Offering Price........................................... 63 Plan of Distribution...................................................... 64 Limited Transferability of Shares......................................... 64 Legal Opinions............................................................ 64 Experts................................................................... 64 Index to Consolidated Financial Statements................................ F-1 Annex 1 The Stockholders' Agreement....................................... A-1 Annex 2 Voting Trust Agreement............................................ B-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MONTGOMERY WARD HOLDING CORP. 3,000,000 SHARES CLASS A COMMON STOCK, SERIES 1 ($.01 PAR VALUE) VOTING TRUST CERTIFICATES REPRESENTING 3,000,000 SHARES CLASS A COMMON STOCK, SERIES 1 ($.01 PAR VALUE) --------------- P R O S P E C T U S --------------- AUGUST 1, 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate (except for the Securities and Exchange Commission filing fee) of the fees and expenses all of which are payable by the Company in connection with the registration and sale of the Shares and Voting Trust Certificates being registered. Securities and Exchange Commission filing fee................... $ 3,000 Costs of printing and engraving................................. 370,000 Legal fees and expense.......................................... 74,000 Accounting fees and expenses.................................... 70,000 Blue Sky fees and expenses...................................... 32,000 Miscellaneous................................................... 5,000 -------- Total....................................................... $554,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware provides that a Delaware corporation may indemnify any persons, including officers and directors, who are, or threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, for criminal proceedings, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred. Article Seventh of the Certificate of Incorporation of the Company provides for indemnification of its officers and directors to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person, in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company and Montgomery Ward have agreed to indemnify Brennan, Pohlmann and Dominic M. Mangone against any and all liability arising out of or in connection with certain derivative actions which II-1 have been brought on behalf of holders of Mobil stock against Brennan, among others, alleging, among other things, that the price paid by the Company for the stock of Montgomery Ward was grossly inadequate. Messrs. Brennan and Pohlmann are each officers or directors of the Company. Brennan was an officer and director of Montgomery Ward prior to the acquisition of Montgomery Ward by the Company. Messrs. Mangone and Pohlmann were each officers of Montgomery Ward prior to the acquisition of Montgomery Ward by the Company. Pursuant to the Stock Purchase Agreement, Mobil and Marcor have released Messrs. Brennan, Mangone and Pohlmann from any liability to Mobil or Marcor arising out of or based upon any act or omission of such persons participating in the offering for sale, or in the sale and purchase of Montgomery Ward. In addition, Mobil's by-laws provide that it will "indemnify to the full extent permitted by . . . . the laws of the State of Delaware, any person made . . . . a party to any action or proceeding . . . . by reason of the fact that he . . . . served any other enterprise as a director or officer at the request of [Mobil]." Pursuant to the Certificate of Incorporation and the By-Laws of GE Capital, those directors of the Company who are executive officers of GE Capital may be entitled to indemnification by GE Capital for their acts as officers of GE Capital, including, without limitation, for serving on the Board of Directors of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Company has issued securities without registration under the Securities Act of 1933 as set forth below. (1) On July 8, 1991, the Company issued 609 Series 1 Shares to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (2) On October 8, 1991, the Company issued 507 and 609 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (3) On January 8, 1992, the Company issued 496 and 596 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (4) On April 8, 1992, the Company issued 320 and 480 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (5) On June 8, 1992, the Company issued 480 Series 1 Shares to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (6) On October 8, 1992, the Company issued 480 Series 1 Shares to Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. II-2 (7) On January 8, 1993, the Company issued 400 and 480 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (8) On March 19, 1993, the Company issued 320 Series 1 Shares to Silas S. Cathcart pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (9) On April 8, 1993, the Company issued 333 and 400 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (10) On July 8, 1993, the Company issued 400 Series 1 Shares to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (11) On October 8, 1993, the Company issued 333 and 400 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (12) On January 8, 1994, the Company issued 333 and 400 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (13) On April 8, 1994, the Company issued 283 and 339 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. (14) On July 8, 1994, the Company issued 283 and 341 Series 1 Shares, respectively, to each of Silas S. Cathcart and Myron Lieberman pursuant to the Company's Directors Plan. Exemption from registration was claimed under Section 4(2) of the Act, regarding transactions by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1. None. 2.(i)(A) Agreement and Plan of Merger dated March 17, 1994 by and among Montgomery Ward & Co., Incorporated, MW Merger Corp., LMR Acquisition Corporation, Lechmere, Inc. and stockholders of LMR Acquisition Corporation executing counterparts of this agreement, incorporated by reference to Exhibit 2.1(A)/2.(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 2.(ii) Agreement of Purchase and Sale of Stock dated February 24, 1994 among Signature Financial/Marketing, Inc., Greater California Dental Services Plan, Inc. and National Dental Services, Inc., incorporated by reference to Exhibit 2.1(A)/2.(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994.
II-3
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Restated Certificate of Incorporation of Registrant, dated June 24, 1988, as amended, incorporated by reference to Ex- hibit 3(a) of the Company's Registration Statement on Form S- 1 (Registration No. 33-23403). *3.2 Certificate of Amendment to Certificate of Incorporation. 3.2(i) Certificate of Amendment to Certificate of Incorporation, in- corporated by reference to Exhibit 3.2(i) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 3.2(ii) Certificate of Amendment to Certificate of Incorporation, filed April 27, 1994. 3.2(iii) Third Restated Certificate of Incorporation of Registrant, filed June 28, 1994. 3.3 Restated By-laws of Registrant, as amended through January 21, 1991, incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990. 3.3(i) Amended and Restated By-Laws of the Registrant, dated April 15, 1994. 4. *(a)(i) Specimen of Class A Common Stock, Series 1, Stock Certificate. *(a)(ii) Specimen of Voting Trust Certificate. (b) Article FOURTH of the Certificate of Incorporation, in- corporated by reference to Exhibit 3.2 (iii) hereto. (c) Stockholders' Agreement, as amended and restated, incor- porated by reference to Annex 1 of the Prospectus contained in this Registration Statement. 5. Opinion of Counsel regarding validity of Class A Common Stock, Series 1. 6. Not applicable. 7. Not applicable. 8. Opinion of Counsel regarding tax matters (included in the opinion filed as Exhibit 5 hereto). 9. Voting Trust Agreement dated as of June 21, 1988, incorpo- rated by reference to Annex 2 of the Prospectus contained in this Registration Statement. 10.(i)(A) All documents filed as exhibits under item (4) above. 10.(i)(B) Stock Purchase Agreement dated March 6, 1988 between Mobil Corporation, Marcor Inc. and BFB Acquisition Corp. incorpo- rated by reference to Exhibit 10.(i)(B) of the Company's Reg- istration Statement on Form S-1 (Registration No. 33-23403). 10.(i)(C) Amended and Restated Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Continental Bank N.A., as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent and the Bank of New York as Negotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(C) of the Company's Form 8-K on September 22, 1992. 10.(i)(C)(1) First Amendment dated as of September 22, 1993 to the Amended and Restated Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Continental Bank N.A. as Documentary Agent, The Bank of Nova Scotia as Administrative Agent, and the Bank of New York as Negotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(C)(1) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 2, 1993.
- -------- *Previously filed as an Exhibit to the Registration Statement. II-4
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.(i)(E) Short Term Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Continental Bank N.A. as Documentary Agent, The Bank of Nova Scotia as Administrative Agent, and the Bank of New York as Negotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(E) of the Company's Form 8-K on September 22, 1992. 10.(i)(E)(1) First Amendment dated as of September 22, 1993 to the Short Term Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Conti- nental Bank N.A. as Documentary Agent, The Bank of Nova Scotia as Administrative Agent, and the Bank of New York as Negotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(E)(1) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 2, 1993. 10.(i)(E)(2) Extension request letter dated September 22, 1993 from Montgomery Ward & Co., Incorporated addressed to all banks who are parties to the Short Term Agreement, and the re- plies of all such banks to such requests, incorporated by reference to Exhibit 10.(i)(E)(2) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(i)(F) Note Purchase Agreements dated March 1, 1993 between Mont- gomery Ward & Co., Incorporated and various lenders, incor- porated by reference to Exhibit 10.(i)(F) of the Company's Annual Report on Form 10-K for the fiscal year ended Janu- ary 2, 1993. 10.(i)(G) Term Loan Agreement dated as of November 24, 1993 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Documentary Agent, The Bank of Nova Scotia, as Administrative Agent, and The Bank of New York as Negotiated Loan Agent, incorporated by ref- erence to Exhibit 10.(i)(G) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(ii)(A) Stock Purchase Agreement dated June 22, 1988 between Gen- eral Electric Capital Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(A) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10.(ii)(B) Account Purchase Agreement dated June 24, 1988 by and be- tween Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Ex- hibit 10.(ii)(B) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). *10.(ii)(B)(1) Letter Agreement dated April 21, 1989, by and between Mont- gomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated (amending the Account Purchase Agreement which is Exhibit 10.(ii)(B) hereto). *10.(ii)(B)(2) Amendment to Account Purchase Agreement dated December 26, 1989 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation. *10.(ii)(B)(3) Letter Agreement dated April 24, 1990 by and between Mont- gomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation. 10.(ii)(B)(4) Letter Agreement dated December 26, 1990, by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(D) of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990. 10.(ii)(B)(5) Fifth Amendment to Account Purchase Agreement dated May 23, 1992 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by refer- ence to Exhibit 10.(ii)(E) of the Company's Quarterly Re- port on Form 10-Q for the fiscal quarterly period ended June 27, 1992.
- -------- *Previously filed as an Exhibit to the Registration Statement. II-5
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.(ii)(B)(6) Amendment dated May 23, 1992 to Letter Agreement dated June 24, 1988 (Signature Credit Agreement) by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corpora- tion, incorporated by reference to Exhibit 10.(ii)(F) of the Company's Quarterly Report on Form 10-Q for the fis- cal quarterly period ended June 27, 1992. 10.(ii)(B)(7) Letter Agreement dated December 29, 1992 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10.(ii)(6) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(ii)(B)(8) Amendment to Account Purchase Agreement dated April 29, 1993 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10.(ii)(H) of the Company's Quar- terly Report on Form 10-Q for the fiscal quarterly pe- riod ended April 3, 1993. 10.(ii)(B)(9) Letter Agreement dated September 15, 1993, by and be- tween Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(G)(2) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(ii)(B)(10) Ninth Amendment to Account Purchase Agreement dated Feb- ruary 16, 1994 by and between Montgomery Ward & Co., In- corporated and Montgomery Ward Credit Corporation, in- corporated by reference to Exhibit 10.(ii)(H) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(ii)(B)(11) Tenth Amendment to Account Purchase Agreement dated June 16, 1994, by and between Montgomery Ward Credit Corpora- tion and Montgomery Ward & Co., Incorporated. 10.(ii)(C) Letter Agreement dated June 24, 1988 among Signature Financial/Marketing, Inc., Montgomery Ward Credit Corpo- ration and Montgomery Ward & Co., Incorporated, incorpo- rated by reference to Exhibit 10.(ii)(C) of the Company's Registration Statement on Form S-1 (Registra- tion No. 33-23403). 10.(ii)(C)(1) Amendment dated May 23, 1992 to Letter Agreement by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Cor- poration, incorporated by reference to Exhibit 10.(ii)(E) of the Company's Quarterly Report on Form 10- Q for the fiscal quarterly period ended June 27, 1992. 10.(ii)(C)(2) Second Amendment dated June 16, 1994 to Signature Credit Agreement by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation. 10.(iv)(A) Montgomery Ward & Co., Incorporated Stock Ownership Plan, incorporated by reference to Exhibit 10.(iv)(A) of the Post-Effective Amendment No. 2 of the Company's Reg- istration Statement on Form S-1 (Registration No. 33- 23403). *10.(iv)(A)(i) Amendments to Montgomery Ward & Co., Incorporated Stock Ownership Plan adopted December 22, 1989. 10.(iv)(A)(ii) Amendments to Montgomery Ward & Co., Incorporated Stock Ownership Plan, incorporated by reference to Exhibit 10.(iv)(A)(ii) of the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 10.(iv)(A)(ii)(a) Montgomery Ward & Co., Incorporated Stock Ownership Plan, as amended and restated May 20, 1994.
- -------- *Previously filed as an Exhibit to the Registration Statement. II-6
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.(iv)(A)(iii) Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions as amended and restated, incorpo- rated by reference to Annex 3 of the Prospectus contained in the Company's Registration Statement on Form S-1 (Reg- istration No. 33-41161). 10.(iv)(A)(iv) Amendment No. 7 to the Montgomery Ward & Co., Incorpo- rated Stock Ownership Plan Terms & Conditions adopted Oc- tober 25, 1991 incorporated by reference to Exhibit 10.(i)(A)(10) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1991. 10.(iv)(A)(v) Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions, as amended and restated May 20, 1994. 10.(iv)(B) Montgomery Ward & Co., Incorporated Long Term Incentive Plan incorporated by reference to Exhibit 10.(iv)(B) of the Company's Registration Statement on Form S-1 (Regis- tration No. 33-23403). 10.(iv)(B)(i) Montgomery Ward & Co., Incorporated Executive Long-Term Incentive Plan. 10.(iv)(C) Montgomery Ward & Co., Incorporated Performance Manage- ment Program incorporated by reference to Exhibit 10.(iv)(C) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10.(iv)(C)(i) Montgomery Ward & Co., Incorporated Senior Executive Per- formance Management Program. 10.(iv)(D) Montgomery Ward & Co., Incorporated Retirement Security Plan (as amended and restated effective as of January 1, 1989) incorporated by reference to Exhibit 10.(iv)(D) of the Post-Effective Amendment No. 3 to the Company's Reg- istration Statement on Form S-1 (Registration No. 33- 23403). 10.(iv)(E) Montgomery Ward & Co., Incorporated Supplemental Retire- ment Plan incorporated by reference to Exhibit 10.(iv)(E) of the Company's Registration Statement on Form S-1 (Reg- istration No. 33-23403). 10.(iv)(F) Montgomery Ward & Co., Incorporated Savings and Profit Sharing Plan (as amended and restated as of January 1, 1989) incorporated by reference to Exhibit 10.(iv)(F) of the Post-Effective Amendment No. 3 to the Company's Reg- istration Statement on Form S-1 (Registration No. 33- 23403). 10.(iv)(G) Montgomery Ward Holding Corp. Directors Fee and Stock Ownership Plan, incorporated by reference to Exhibit 10.(iv)(F) of the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 10.(iv)(H) Montgomery Ward Holding Corp. Senior Officer Severance Plan, incorporated by reference to Exhibit 10.(iv)(G) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. *10.(iv)(I) Montgomery Ward & Co., Incorporated Success Plan. 10.(vi) Employment Agreement effective January 14, 1991 between Montgomery Ward & Co., Incorporated and Bernard W. An- drews, incorporated by reference to Exhibit 10.(vi) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(vii) Agreement effective October 21, 1991 between Montgomery Ward & Co., Incorporated and Fingerhut Companies, Inc., incorporated by reference to Exhibit 10.(vii) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
- -------- *Previously filed as an Exhibit to the Registration Statement. II-7
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.(viii) Line of Credit Agreement effective November 19, 1991 between Montgomery Ward & Co., Incorporated and The Northern Trust Company and The First National Bank of Chicago, incorporated by reference to Exhibit 10.(viii) of the Company's Annual Re- port on Form 10-K for the fiscal year ended December 28, 1991. 10.(ix) Employment Agreement effective September 3, 1992 between Mont- gomery Ward & Co., Incorporated and Harold Kahn, incorporated by reference to Exhibit 10.(ix) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(x) Employment Agreement effective September 17, 1992 between Montgomery Ward & Co., Incorporated and Leslie A. Ball, incor- porated by reference to Exhibit 10.(x) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(xi) Employment Agreement effective November 1, 1991 between Mont- gomery Ward & Co., Incorporated and Richard Bergel, incorpo- rated by reference to Exhibit 10.(xi) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(xi)(A) Employment Agreement dated March 1, 1994 between Montgomery Ward & Co., Incorporated and Richard Bergel. 10.(xii) Employment Agreement effective December 31, 1993 between Mont- gomery Ward & Co., Incorporated and Robert F. Connolly, incor- porated by reference to Exhibit 10.(ix) of the Company's An- nual Report on Form 10-K for the fiscal year ended January 1, 1994. 11. Statement regarding computation of per share earnings incorpo- rated by reference to Exhibit 11 of the Company's Annual Re- port on Form 10-K for the fiscal year ended January 1, 1994. 12. Not applicable. 14. Not applicable. 15. Not applicable. *21. Subsidiaries of the Registrant. 23. Consents of Experts and Counsel. (a) The consent of Arthur Andersen & Co. (b) The consent of Altheimer & Gray is included in that firm's opinion as Exhibit 5 hereto. *24. Powers of attorney executed by the following Directors and Of- ficers of Montgomery Ward Holding Corp. authorizing execution of the Registration Statement on Form S-1 and amendments, in- cluding post-effective amendments, thereto: (a) Bernard F. Brennan (b) Richard Bergel (c) Myron Lieberman (d) Denis J. Nayden *24.(A) Power of Attorney dated May 24, 1990, executed by James A. Parke authorizing execution of post-effective amendments to the Registration Statement on Form S-1. *24.(C) Power of Attorney dated May 19, 1993, executed by Spencer H. Heine authorizing execution of post-effective amendments to the Registration Statement on Form S-1.
- -------- *Previously filed as an Exhibit to the Registration Statement. II-8
EXHIBIT NUMBER DESCRIPTION ------- ----------- 24.(D) Power of Attorney dated July 26, 1994, executed by Bernard W. Andrews authorizing execution of post-effective amendments to the Registration Statement on Form S-1. 25. Not applicable. 26. Not applicable. 27. Financial Statement Schedules, incorporated by reference to Ex- hibit 27 of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 28. Not applicable.
- -------- *Previously filed as an Exhibit to the Registration Statement. (b) Financial Statement Schedules: II. Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties, incorporated by reference to Exhibit 27. IX. Short-Term Borrowings, incorporated by reference to Exhibit 27. Schedules not included have been omitted because they are not applicable, not required, not material, or the required information is given in the financial statements or notes thereto or combined with the information presented in other schedules or exhibits. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person, in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (a) to file, during any period in which offers or sales are being made of the securities offered herein, a post-effective amendment to this Registration Statement; (i) to include any prospectus required by section 10(a)(3) of the Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information set forth in this Registration Statement. (b) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-9 (c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that: (a) For purposes of determining liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430 A under the Act and continued in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For purposes of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT NO. 6 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, AND STATE OF ILLINOIS, ON THE 1ST DAY OF AUGUST, 1994. Montgomery Ward Holding Corp. /s/ John L. Workman By:__________________________________ John L. Workman Executive Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST- EFFECTIVE AMENDMENT NO. 6 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON AUGUST 1, 1994.
SIGNATURE TITLE --------- ----- Bernard F. Brennan* Chairman of the Board of Directors and Chief Executive Officer, and a Director /s/ John L. Workman - ------------------------------------------- John L. Workman Executive Vice President and Chief Financial Officer Bernard W. Andrews* President and Chief Operating Officer and a Director Richard Bergel* Vice Chairman and a Director Spencer H. Heine* Executive Vice President, Secretary and General Counsel and a Director Myron Lieberman* Director Denis J. Nayden* Director James A. Parke* Director /s/ Edwin G. Pohlmann *By:_________________________________ Edwin G. Pohlmann Attorney-in-Fact - ------------------------------------------- Silas S. Cathcart Director - ------------------------------------------- David D. Ekedahl Director
II-11 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 1. None. 2.(i)(A) Agreement and Plan of Merger dated March 17, 1994 by and among Montgomery Ward & Co., Incorporated, MW Merger Corp., LMR Acquisition Corporation, Lechmere, Inc. and stockholders of LMR Acquisition Corporation executing counterparts of this agreement, incorporated by reference to Exhibit 2.1(A)/2.(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 2.(ii) Agreement of Purchase and Sale of Stock dated February 24, 1994 among Signature Financial/Marketing, Inc., Greater California Dental Services Plan, Inc. and National Dental Services, Inc., incorporated by reference to Exhibit 2.1(A)/2.(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 3.1 Restated Certificate of Incorporation of Registrant, dated June 24, 1988, as amended, incorporated by refer- ence to Exhibit 3(a) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). *3.2 Certificate of Amendment to Certificate of Incorpora- tion. 3.2(i) Certificate of Amendment to Certificate of Incorpora- tion, incorporated by reference to Exhibit 3.2(i) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 3.2(ii) Certificate of Amendment to Certificate of Incorpora- tion, filed April 27, 1994. 3.2(iii) Third Restated Certificate of Incorporation of Regis- trant, filed June 28, 1994. 3.3 Restated By-laws of Registrant, as amended through Jan- uary 21, 1991, incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990. 3.3(i) Amended and Restated By-Laws of the Registrant, dated April 15, 1994. 4. *(a)(i) Specimen of Class A Common Stock, Series 1, Stock Certificate. *(a)(ii) Specimen of Voting Trust Certificate. (b) Article FOURTH of the Certificate of Incorporation, incorporated by reference to Exhibit 3.2 (iii) hereto. (c) Stockholders' Agreement, as amended and restated, incorporated by reference to Annex 1 of the Prospectus contained in this Registration Statement. 5. Opinion of Counsel regarding validity of Class A Common Stock, Series 1. 6. Not applicable. 7. Not applicable. 8. Opinion of Counsel regarding tax matters (included in the opinion filed as Exhibit 5 hereto). 9. Voting Trust Agreement dated as of June 21, 1988, in- corporated by reference to Annex 2 of the Prospectus contained in this Registration Statement. 10.(i)(A) All documents filed as exhibits under item (4) above.
- -------- *Previously filed as an Exhibit to the Registration Statement. 1
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.(i)(B) Stock Purchase Agreement dated March 6, 1988 between Mobil Corporation, Marcor Inc. and BFB Acquisition Corp. incorporated by reference to Exhibit 10.(i)(B) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10.(i)(C) Amended and Restated Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., In- corporated, various banks, Continental Bank N.A., as Documentary Agent, The Bank of Nova Scotia, as Ad- ministrative Agent and the Bank of New York as Nego- tiated Loan Agent, incorporated by reference to Ex- hibit 10.(i)(C) of the Company's Form 8-K on Septem- ber 22, 1992. 10.(i)(C)(1) First Amendment dated as of September 22, 1993 to the Amended and Restated Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Continental Bank N.A. as Documentary Agent, The Bank of Nova Scotia as Ad- ministrative Agent, and the Bank of New York as Ne- gotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(C)(1) of the Company's Quarterly Re- port on Form 10-Q for the fiscal quarterly period ended October 2, 1993. 10.(i)(E) Short Term Credit Agreement dated as of September 22, 1992 among Montgomery Ward & Co., Incorporated, various banks, Continental Bank N.A. as Documentary Agent, The Bank of Nova Scotia as Administrative Agent, and the Bank of New York as Negotiated Loan Agent, incorporated by reference to Exhibit 10.(i)(E) of the Company's Form 8-K on September 22, 1992. 10.(i)(E)(1) First Amendment dated as of September 22, 1993 to the Short Term Credit Agreement dated as of Septem- ber 22, 1992 among Montgomery Ward & Co., Incorpo- rated, various banks, Continental Bank N.A. as Docu- mentary Agent, The Bank of Nova Scotia as Adminis- trative Agent, and the Bank of New York as Negoti- ated Loan Agent, incorporated by reference to Ex- hibit 10.(i)(E)(1) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended October 2, 1993. 10.(i)(E)(2) Extension request letter dated September 22, 1993 from Montgomery Ward & Co., Incorporated addressed to all banks who are parties to the Short Term Agreement, and the replies of all such banks to such requests, incorporated by reference to Exhibit 10.(i)(E)(2) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(i)(F) Note Purchase Agreements dated March 1, 1993 between Montgomery Ward & Co., Incorporated and various lenders, incorporated by reference to Exhibit 10.(i)(F) of the Company's Annual Report on Form 10- K for the fiscal year ended January 2, 1993. 10.(i)(G) Term Loan Agreement dated as of November 24, 1993 among Montgomery Ward & Co., Incorporated, various banks, The First National Bank of Chicago, as Docu- mentary Agent, The Bank of Nova Scotia, as Adminis- trative Agent, and The Bank of New York as Negoti- ated Loan Agent, incorporated by reference to Ex- hibit 10.(i)(G) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(ii)(A) Stock Purchase Agreement dated June 22, 1988 between General Electric Capital Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(A) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403).
- -------- *Previously filed as an Exhibit to the Registration Statement. 2
SEQUENTIAL PAGE EXHIBIT NUMBER DESCRIPTION NUMBER -------------- ----------- ---------- 10.(ii)(B) Account Purchase Agreement dated June 24, 1988 by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorpo- rated by reference to Exhibit 10.(ii)(B) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). *10.(ii)(B)(1) Letter Agreement dated April 21, 1989, by and be- tween Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated (amending the Account Purchase Agreement which is Exhibit 10.(ii)(B) hereto). *10.(ii)(B)(2) Amendment to Account Purchase Agreement dated De- cember 26, 1989 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Cor- poration. *10.(ii)(B)(3) Letter Agreement dated April 24, 1990 by and be- tween Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation. 10.(ii)(B)(4) Letter Agreement dated December 26, 1990, by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(D) of the Company's Annual Report on Form 10-K for the fis- cal year ended December 29, 1990. 10.(ii)(B)(5) Fifth Amendment to Account Purchase Agreement dated May 23, 1992 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10.(ii)(E) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 27, 1992. 10.(ii)(B)(6) Amendment dated May 23, 1992 to Letter Agreement dated June 24, 1988 (Signature Credit Agreement) by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgom- ery Ward Credit Corporation, incorporated by ref- erence to Exhibit 10.(ii)(F) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 27, 1992. 10.(ii)(B)(7) Letter Agreement dated December 29, 1992 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10.(ii)(6) of the Company's Annual Report on Form 10-K for the fis- cal year ended January 2, 1993. 10.(ii)(B)(8) Amendment to Account Purchase Agreement dated April 29, 1993 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Cor- poration, incorporated by reference to Exhibit 10.(ii)(H) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended April 3, 1993. 10.(ii)(B)(9) Letter Agreement dated September 15, 1993, by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by reference to Exhibit 10.(ii)(G)(2) of the Company's Annual Report on Form 10-K for the fis- cal year ended January 1, 1994. 10.(ii)(B)(10) Ninth Amendment to Account Purchase Agreement dated February 16, 1994 by and between Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Exhibit 10.(ii)(H) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(ii)(B)(11) Tenth Amendment to Account Purchase Agreement dated June 16, 1994, by and between Montgomery Ward Credit Corporation and Montgomery Ward & Co., Incorporated.
- -------- *Previously filed as an Exhibit to the Registration Statement. 3
SEQUENTIAL PAGE EXHIBIT NUMBER DESCRIPTION NUMBER -------------- ----------- ---------- 10.(ii)(C) Letter Agreement dated June 24, 1988 among Signature Financial/Marketing, Inc., Montgom- ery Ward Credit Corporation and Montgomery Ward & Co., Incorporated, incorporated by ref- erence to Exhibit 10.(ii)(C) of the Company's Registration Statement on Form S-1 (Registra- tion No. 33-23403). 10.(ii)(C)(1) Amendment dated May 23, 1992 to Letter Agree- ment by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation, incorporated by reference to Ex- hibit 10.(ii)(E) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 27, 1992. 10.(ii)(C)(2) Second Amendment dated June 16, 1994 to Signa- ture Credit Agreement by and among Signature Financial/Marketing, Inc., Montgomery Ward & Co., Incorporated and Montgomery Ward Credit Corporation. 10.(iv)(A) Montgomery Ward & Co., Incorporated Stock Own- ership Plan, incorporated by reference to Ex- hibit 10.(iv)(A) of the Post-Effective Amend- ment No. 2 of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). *10.(iv)(A)(i) Amendments to Montgomery Ward & Co., Incorpo- rated Stock Ownership Plan adopted December 22, 1989. 10.(iv)(A)(ii) Amendments to Montgomery Ward & Co., Incorpo- rated Stock Ownership Plan, incorporated by reference to Exhibit 10.(iv)(A)(ii) of the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 10.(iv)(A)(ii)(a) Montgomery Ward & Co., Incorporated Stock Own- ership Plan, as amended and restated May 20, 1994. 10.(iv)(A)(iii) Montgomery Ward & Co., Incorporated Stock Own- ership Plan Terms and Conditions as amended and restated, incorporated by reference to An- nex 3 of the Prospectus contained in the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 10.(iv)(A)(iv) Amendment No. 7 to the Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms & Con- ditions adopted October 25, 1991 incorporated by reference to Exhibit 10.(i)(A)(10) of the Company's Quarterly Report on Form 10-Q for the fiscal quarterly period ended September 28, 1991. 10.(iv)(A)(v) Montgomery Ward & Co., Incorporated Stock Own- ership Plan Terms and Conditions, as amended and restated May 20, 1994. 10.(iv)(B) Montgomery Ward & Co., Incorporated Long Term Incentive Plan incorporated by reference to Exhibit 10.(iv)(B) of the Company's Registra- tion Statement on Form S-1 (Registration No. 33-23403). 10.(iv)(B)(i) Montgomery Ward & Co., Incorporated Executive Long-Term Incentive Plan. 10.(iv)(C) Montgomery Ward & Co., Incorporated Perfor- mance Management Program incorporated by ref- erence to Exhibit 10.(iv)(C) of the Company's Registration Statement on Form S-1 (Registra- tion No. 33-23403). 10.(iv)(C)(i) Montgomery Ward & Co., Incorporated Senior Ex- ecutive Performance Management Program. 10.(iv)(D) Montgomery Ward & Co., Incorporated Retirement Security Plan (as amended and restated effec- tive as of January 1, 1989) incorporated by reference to Exhibit 10.(iv)(D) of the Post- Effective Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registra- tion No. 33-23403).
- -------- *Previously filed as an Exhibit to the Registration Statement. 4
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 10.(iv)(E) Montgomery Ward & Co., Incorporated Supplemental Re- tirement Plan incorporated by reference to Exhibit 10.(iv)(E) of the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10.(iv)(F) Montgomery Ward & Co., Incorporated Savings and Profit Sharing Plan (as amended and restated as of January 1, 1989) incorporated by reference to Exhibit 10.(iv)(F) of the Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-23403). 10.(iv)(G) Montgomery Ward Holding Corp. Directors Fee and Stock Ownership Plan, incorporated by reference to Exhibit 10.(iv)(F) of the Company's Registration Statement on Form S-1 (Registration No. 33-41161). 10.(iv)(H) Montgomery Ward Holding Corp. Senior Officer Sever- ance Plan, incorporated by reference to Exhibit 10.(iv)(G) of the Company's Annual Report on Form 10- K for the fiscal year ended January 2, 1993. *10.(iv)(I) Montgomery Ward & Co., Incorporated Success Plan. 10.(vi) Employment Agreement effective January 14, 1991 be- tween Montgomery Ward & Co., Incorporated and Bernard W. Andrews, incorporated by reference to Exhibit 10.(vi) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 10.(vii) Agreement effective October 21, 1991 between Montgom- ery Ward & Co., Incorporated and Fingerhut Companies, Inc., incorporated by reference to Exhibit 10.(vii) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.(viii) Line of Credit Agreement effective November 19, 1991 between Montgomery Ward & Co., Incorporated and The Northern Trust Company and The First National Bank of Chicago, incorporated by reference to Exhibit 10.(viii) of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.(ix) Employment Agreement effective September 3, 1992 be- tween Montgomery Ward & Co., Incorporated and Harold Kahn, incorporated by reference to Exhibit 10.(ix) of the Company's Annual Report on Form 10-K for the fis- cal year ended January 2, 1993. 10.(x) Employment Agreement effective September 17, 1992 be- tween Montgomery Ward & Co., Incorporated and Leslie A. Ball, incorporated by reference to Exhibit 10.(x) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(xi) Employment Agreement effective November 1, 1991 be- tween Montgomery Ward & Co., Incorporated and Richard Bergel, incorporated by reference to Exhibit 10.(xi) of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. 10.(xi)(A) Employment Agreement dated March 1, 1994 between Montgomery Ward & Co., Incorporated and Richard Bergel. 10.(xii) Employment Agreement effective December 31, 1993 be- tween Montgomery Ward & Co., Incorporated and Robert F. Connolly, incorporated by reference to Exhibit 10.(ix) of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994.
- -------- *Previously filed as an Exhibit to the Registration Statement. 5
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 11. Statement regarding computation of per share earnings incorporated by reference to Exhibit 11 of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 12. Not applicable. 14. Not applicable. 15. Not applicable. *21. Subsidiaries of the Registrant. 23. Consents of Experts and Counsel. (a) The consent of Arthur Andersen & Co. (b) The consent of Altheimer & Gray is included in that firm's opinion as Exhibit 5 hereto. *24. Powers of attorney executed by the following Directors and Officers of Montgomery Ward Holding Corp. authoriz- ing execution of the Registration Statement on Form S-1 and amendments, including post-effective amendments, thereto: (a) Bernard F. Brennan (b) Richard Bergel (c) Myron Lieberman (d) Denis J. Nayden *24.(A) Power of Attorney dated May 24, 1990, executed by James A. Parke authorizing execution of post-effective amend- ments to the Registration Statement on Form S-1. *24.(C) Power of Attorney dated May 19, 1993, executed by Spen- cer H. Heine authorizing execution of post-effective amendments to the Registration Statement on Form S-1. 24.(D) Power of Attorney dated July 26, 1994, executed by Ber- nard W. Andrews authorizing execution of post-effective amendments to the Registration Statement on Form S-1. 25. Not applicable. 26. Not applicable. 27. Financial Statement Schedules, incorporated by refer- ence to Exhibit 27 of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. 28. Not applicable.
- -------- *Previously filed as an Exhibit to the Registration Statement. 6 EX-3.2(II) 2 EXHIBIT 3.2(II) EXHIBIT 3.2(ii) STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE -------------------------------- I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "MONTGOMERY WARD HOLDING CORP.", FILED IN THIS OFFICE ON THE TWENTY-SEVENTH DAY OF APRIL, A.D. 1994, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS FOR RECORDING. /s/ William T. Quillen [SEAL] -------------------------------------- William T. Quillen, Secretary of State 2151394 8100 AUTHENTICATION: 7102067 944073191 DATE: 04-27-94 CERTIFICATE OF AMENDMENT ------------------------ TO -- CERTIFICATE OF INCORPORATION ---------------------------- OF -- MONTGOMERY WARD HOLDING CORP. ----------------------------- MONTGOMERY WARD HOLDING CORP., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The original Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on February 8, 1988 and recorded in the Office of the Recorder of Kent County, Delaware. The name under which the Corporation was originally incorporated is BFB Acquisition Corp. 2. Article FOURTH of the Certificate of Incorporation of the Corporation is hereby amended as follows: (i) The introduction to Article FOURTH and Part A thereof are amended in their entirety to read as follows: FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is fifty-five million four hundred twelve thousand seven hundred fifty (55,412,750) consisting of the following amounts in the following designations: 1. Common Stock. Fifty-five million four hundred twelve thousand (55,412,000) shares of Common Stock, par value one cent ($0.01) per share (hereinafter referred to as "Common Stock"), which shall consist of the following classes: (a) thirty million four hundred twelve thousand (30,412,000) shares of Class A Common Stock (hereinafter referred to as "Class A Common Stock"), which shall consist of the following series: (i) twenty-five million (25,000,000) shares of Class A Common Stock, Series 1 (hereinafter referred to as "Class A Common Stock, Series 1"), and (ii) five million four hundred twelve thousand (5,412,000) shares of Class A Common Stock, Series 2 (hereinafter referred to as "Class A Common Stock, Series 2"), and (b) twenty-five million (25,000,000) shares of Class B Common Stock (hereinafter referred to as the "Class B Common Stock"). 2. Preferred Stock. Seven hundred fifty (750) shares of Preferred Stock, par value one dollar ($1.00) per share (hereinafter referred to as "Preferred Stock" or "Senior Preferred Stock"). Such shares of Common Stock and Preferred Stock may be issued for such consideration, not less than the par value thereof, as shall be fixed from time to time by the Board of Directors, and shares issued for not less than the consideration so fixed shall be fully paid and non-assessable. A statement of the powers, preferences, rights, qualifications, limitations, restrictions and the relative, participating, optional and other special rights in respect of the shares of each class or series of stock is as follows: PART A. SENIOR PREFERRED STOCK Except as otherwise provided herein, each share of Senior Preferred Stock shall be identical in all respects to all other shares of Senior Preferred Stock and shall entitle the holder thereof to the same rights and privileges as to which the holders of the other shares of Senior Preferred Stock are entitled. 1. Rank. The Senior Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to the Common Stock. 2. Dividends. (a) In each year, the holders of the shares of Senior Preferred Stock shall be entitled to receive, before any dividends shall be declared and paid upon or set aside for the Common Stock, when and as declared by the Board of Directors, except as may be prohibited by Section A.5, out of funds legally available for that purpose, cumulative cash dividends at the annual rate of four thousand eight hundred fifty dollars ($4,850) per share (the "Dividend Rate"), and no more, in equal quarterly payments of one thousand two hundred twelve dollars and fifty cents ($1,212.50) per share, on the last business day of March, June, September and December (each of such dates being a "Dividend Payment Date"), commencing with the Dividend Payment Date in June, 1994. The dividend payable on the Dividend Payment Date in June, 1994 with respect to any share of Senior Preferred Stock shall be the pro rata amount of the Dividend Rate based upon the number of days from and including the date of first issuance (the "Issuance Date") of the Senior Preferred Stock up to and including the Dividend Payment Date in June, 1994 and a 365-day year. (The period from the Issuance Date to the first Dividend Payment Date, and each quarterly period between consecutive Dividend Payment Dates, shall hereinafter be referred to as a "Dividend Period.") Such dividends shall be paid to the holders of record at the close of business on the 2 date specified by the Board of Directors of the Corporation at the time such dividend is declared; provided, however, that such date shall not be more than sixty (60) days nor less than ten (10) days prior to the respective Dividend Payment Date. Dividends on the Senior Preferred Stock shall be cumulative from the Issuance Date (whether or not there shall be net profits or net assets of the Corporation legally available for the payment of such dividends), so that: (i) except as provided in Section A.2(a)(ii), the Corporation shall not take any of the following actions: (A) declare, order or pay any dividend on any class of stock ranking as to dividends or on liquidation junior to the Senior Preferred Stock (such junior stock being herein sometimes referred to as the "Stock Junior to the Senior Preferred Stock"), or (B) redeem any Stock Junior to the Senior Preferred Stock. (each of such actions described in clauses A.2(a)(i)(A) or (B) above being herein sometimes referred to as a "Junior Distribution" and the proposed date of each such action being herein sometimes referred to as a "Proposed Junior Distribution Date") if the Corporation shall not, on or before the Proposed Junior Distribution Date, have completed both of the following: (1) declared on the outstanding shares of Senior Preferred Stock, and paid or set apart for payment, all "Accrued Dividends" (defined in Section A.4(c)(i)) to the Proposed Junior Distribution Date; and (2) paid or deposited as required in this Part A all amounts payable to holders of Senior Preferred Stock in respect of all mandatory redemptions required to have been paid or deposited for their benefit on or before the Proposed Junior Distribution Date; and (ii) the Corporation may redeem or purchase any shares of Common Stock in accordance with either (x) the terms, conditions and provisions of the "Stockholders Agreement" (defined in Section C.1) or (y) the terms, conditions and provisions of the "Employee Stock Option 3 Plan" (defined in Section C.1), if on or before the date of each such proposed Common Stock redemption or purchase (each such time, with respect to redemptions or purchases under either the Stockholders Agreement or the Employee Stock Option Plan, being herein sometimes referred to as a "Proposed Common Stock Repurchase Date"), the Corporation shall have: (A) declared on the outstanding shares of Senior Preferred Stock, and paid or set apart for payment, all Accrued Dividends (defined in Section A.4(c)(i)) through all Dividend Payment Dates occurring on or prior to such Proposed Common Stock Repurchase Date, and (B) paid or deposited as required in this Part A all amounts payable to holders of Senior Preferred Stock in respect of all mandatory redemptions required to have been paid or deposited for their benefit on or before all "Mandatory Redemption Dates" (defined in Section A.4(a)(i)) occurring on or prior to such Proposed Common Stock Repurchase Date. All dividends declared upon Senior Preferred Stock and any other class of stock ranking on a parity as to dividends with the Senior Preferred Stock shall be declared pro rata per share. Accrued but unpaid dividends shall not bear interest. (b) Each fractional share of the Senior Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends to which each outstanding full share of the Senior Preferred Stock is entitled pursuant to Section A.2(a) hereof, and all of such dividends with respect to such outstanding fractional shares shall be fully cumulative and shall accrue (whether or not declared) and shall be payable in the same manner and at such times as provided for in Section A.2(a) with respect to dividends on each outstanding full share of the Senior Preferred Stock. 3. Rights on Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of shares of Senior Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, except as may be prohibited by Section A.5, but before any payment shall be made to the holders of any stock ranking on liquidation junior to the Senior Preferred Stock, 4 an amount equal to one hundred thousand dollars ($100,000) per share, plus an amount equal to Accrued Dividends (as defined in Section A.4(c)(i)) to the date of payment (the "Liquidation Payment"). If upon any liquidation, dissolution or winding up of the Corporation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Senior Preferred Stock the full amounts to which they respectively shall be entitled, the holders of shares of Senior Preferred Stock, and any class of stock ranking on liquidation on a parity with the Senior Preferred Stock, shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. In the event of any liquidation, dissolution or winding up of the Corporation after payment shall have been made to the holders of shares of Senior Preferred Stock and any class of stock ranking on liquidation on a parity with the Senior Preferred Stock of the full amount to which they shall be entitled as aforesaid, the holders of any class or classes of stock ranking on liquidation junior to the Senior Preferred Stock shall be entitled, to the exclusion of the holders of shares of Senior Preferred Stock, to share, according to their respective rights and preferences, in all remaining assets of the Corporation available for distribution to its stockholders. (b) The Liquidation Payment with respect to each fractional share of the Senior Preferred Stock outstanding or accrued but unpaid, shall be equal to a ratably proportionate amount of the Liquidation Payment with respect to each outstanding share of Senior Preferred Stock. (c) For the purposes of this Section A.3, neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets shall be deemed to be a liquidation, dissolution or winding up of the Corporation, unless such transaction shall be in connection with the liquidation, dissolution or winding up of the Corporation. 4. Redemption. (a) Mandatory Redemption. (i) The holders of not less than a majority of the outstanding shares of Senior Preferred Stock may, by notice served on the Corporation, require the Corporation to redeem, on the date which is four (4) months after the effective date of such notice, but not prior to the date which is one day after the fifth anniversary of the Issuance Date, all 5 or any portion, as set forth in such notice, of the outstanding shares of Senior Preferred Stock at a redemption price of (A) one hundred thousand dollars ($100,000) per share (payable in cash or other consideration as the Corporation and holders of a majority of the Senior Preferred Stock may agree), plus (B) an amount equal to Accrued Dividends (defined in Section A.4(c)(i)) to the date of payment (the "Redemption Price") (each such date being herein sometimes referred to as a "Mandatory Redemption Date"). Such notice may be given from time to time with respect to any partial or full redemptions. Notice of every redemption pursuant to this Section A.4(a) shall be personally delivered or sent by certified mail, postage prepaid and return receipt requested, to the Corporation at the address of its principal executive offices to the attention of its Secretary. Such notice shall be effective upon receipt by the Corporation. The procedures set forth in Section A.4(b)(i) shall be followed for partial redemptions. (ii) On and after any Mandatory Redemption Date (unless default shall be made by the Corporation in depositing moneys for the payment of the Redemption Price as hereinafter provided), all rights of the holders of shares of Senior Preferred Stock as stockholders of the Corporation with respect to those shares of Senior Preferred Stock to be redeemed, except the right to receive the Redemption Price as hereinafter provided, shall cease and terminate. (iii) The Corporation shall provide moneys for the payment of the Redemption Price by depositing on the Mandatory Redemption Date the amount thereof for the account of the holders of record of the Senior Preferred Stock entitled thereto with the Continental Bank N.A., or such other bank or trust company doing business in the City of Chicago, as may be designated by (A) the holders of not less than a majority of the outstanding shares of Senior Preferred Stock, and, failing said designation, (B) the Corporation, as paying agent for the benefit of such holders. The holders of the shares of Senior Preferred Stock redeemed shall surrender to the Corporation the certificates for the shares of Senior Preferred Stock so redeemed. Upon notification by such designated bank or trust company to the holders of Senior Preferred Stock that such moneys representing the Redemption Price have been deposited by the Corporation, the shares designated for redemption shall no longer be outstanding, whether or not the certificates for the shares so redeemed have been received by the 6 Corporation on the date of such notification and all rights relating thereto shall cease and terminate. (b) Optional Redemption. (i) So long as any shares of Senior Preferred Stock are outstanding, except as may be prohibited by Section A.5, the Corporation may, at the option of the Board of Directors, at any time or from time to time after the Issuance Date, redeem the whole or any part of such Senior Preferred Stock. Any redemption pursuant to this Section A.4(b)(i) shall be at the Redemption Price. If less than all the shares of Senior Preferred Stock at any time outstanding shall be called for redemption, the redemption shall be made pro rata with respect to such shares and in such manner as may be prescribed by resolution of the Board of Directors. The date of each such redemption is herein sometimes referred to as an "Optional Redemption Date". (ii) Notice of every redemption pursuant to this Section A.4(b) shall be sent by first-class mail, postage prepaid, to the holders of record of the shares of Senior Preferred Stock so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. Such notice shall be mailed not less than ten (10) business days in advance of the Optional Redemption Date to the holders of record of the shares of Senior Preferred Stock so to be redeemed. On and after the Optional Redemption Date, unless default shall be made by the Corporation in providing moneys to the bank or trust company for the account of the holders of record of the Senior Preferred Stock as provided in Section A.4(a)(iii) for the payment of the Redemption Price, all rights of the holders of Senior Preferred Stock as stockholders of the Corporation with respect to those shares of Senior Preferred Stock to be redeemed, except the right to receive the Redemption Price, shall cease and terminate whether or not the certificates for the shares so redeemed have been received by the Corporation as provided in Section A.4(a)(iii). In this Section A.4(b)(ii), a business day refers to any day, except a Saturday, Sunday or any day on which banks in the City of Chicago are authorized or required by law to close. (c) Definitions. (i) The term "Accrued Dividends" with respect to the Senior Preferred Stock shall mean, as of any given time, the 7 then "Full Cumulative Dividends" (defined in Section A.4(c)(ii)) less the amount of all dividends theretofore paid upon the relevant shares of Senior Preferred Stock. (ii) The term "Full Cumulative Dividends" with respect to the Senior Preferred Stock shall mean (whether or not in any Dividend Period, or any part thereof, in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends upon the relevant shares at the full rate fixed for Senior Preferred Stock as provided herein for the period of time elapsed from the date of issuance thereof to the date as of which Full Cumulative Dividends are computed. (d) Shares of Senior Preferred Stock which have been issued and reaquired in any manner, including shares purchased or redeemed or exchanged, shall not be reissued. (e) Each fractional share of the Senior Preferred Stock outstanding shall be entitled to a ratably proportionate fraction of the Redemption Price payable in respect of each outstanding full share of the Senior Preferred Stock pursuant to this Section A.4, and such fraction of the price shall be payable in the same manner and at such times as provided for in this Section A.4 with respect to redemptions of each outstanding full share of the Senior Preferred Stock. (f) The foregoing provisions of this Section A.4 to the contrary notwithstanding but without limitation of the Corporation's obligations to make mandatory redemptions as required by Section A.4(a), unless the Accrued Dividends on all outstanding shares of Senior Preferred Stock shall have been paid or contemporaneously are declared and paid through the date of a proposed optional redemption, none of the shares of Senior Preferred Stock shall be redeemed unless all outstanding shares of Senior Preferred Stock are simultaneously redeemed and the Corporation shall not purchase by optional redemption or otherwise acquire any shares of Senior Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Senior Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Senior Preferred Stock. (g) If fewer than all the outstanding shares of Senior Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors in accordance with the provisions of this Part A, and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors. 8 5. Redemption on Payments. Anything contained in this Article to the contrary notwithstanding, no cash dividends or dividends paid by transfer of any other property on shares of the Senior Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Corporation, no distribution in respect of the Senior Preferred Stock shall be paid or set apart for payment by the Corporation, and no payment shall be made by the Corporation with respect to any redemption of the Senior Preferred Stock (such payments, distributions and settings aside being herein sometimes referred to collectively as "Distributions") at any time when the terms and provisions of any agreement to which the Corporation or any other member of the "Wards Group" (defined in Section C.1) is a party relating to indebtedness for money borrowed specifically prohibits or limits such Distribution (and such Distribution exceeds said limits), or such Distribution would constitute a breach, default or event of default thereunder. 6. Voting Rights. (a) Except as expressly provided in Section A.6(b) or elsewhere in this certificate of incorporation or as required by law (in relation to which the holders of shares of Senior Preferred Stock shall be treated as a class), the holders of shares of Senior Preferred Stock shall not have voting rights and at every meeting of the stockholders of the Corporation, or by written consent in lieu of any such meeting, all voting power in the election of directors and/or for all other purposes shall be vested exclusively in the holders of shares of Common Stock. Without limitation of the next preceding sentence and without implication that the contrary would otherwise be true, no consent of the holders of Senior Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation of any class of stock of the Corporation junior in right as to dividends and upon liquidation to the Senior Preferred Stock, or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof. (b) Anything elsewhere in this certificate of incorporation to the contrary notwithstanding, if (i) Accrued Dividends on the Senior Preferred Stock are not paid in full on any of four (4) consecutive Dividend Payment Dates, or (ii) the Corporation shall have failed to effect the redemption of shares of Senior Preferred Stock on a Mandatory Redemption Date as required in Section A.4(a), the holders of shares of Senior Preferred Stock shall have voting rights as specified in this Section A.6(b). In the event of the occurrence of either of the foregoing events, such occurrence shall mark the beginning of a period (the "Default Period") which shall continue until such time as (i) Accrued Dividends on the Senior Preferred Stock have been paid in full through the date of payment, or (ii) the 9 failure to redeem shares of Senior Preferred Stock as required by Section A.4(a) has been cured by the Corporation. Any provision of the by-laws of the Corporation to the contrary notwithstanding, during any Default Period, the holders of shares of the Senior Preferred Stock then outstanding shall have the exclusive and special right (but not the obligation), voting separately as a class (each share of Senior Preferred Stock being entitled to one (1) vote), to elect one (1) director to the Board of Directors of the Corporation (the "Preferred Stock Director") and the number of directors constituting the Board of Directors of the Corporation shall be automatically increased in order to provide one (1) vacancy for the Preferred Stock Director. Upon written request, made at any time after the beginning of the Default Period, by the holders of not less than a majority of the shares of the Senior Preferred Stock then outstanding, the Corporation shall call a special meeting of all of the stockholders of the Corporation, at which meeting the holders of shares of Senior Preferred Stock, voting separately as a class, shall elect the Preferred Stock Director as set forth above; provided, however, that if such meeting shall not have been called by the Corporation within ten (10) days after the beginning of a Default Period, such meeting may be called, upon like notice, at the expense of the Corporation, by the holders of not less than a majority of the outstanding shares of Senior Preferred Stock. After the first such election during any Default Period, the holders of the shares of Senior Preferred Stock, voting separately as a class, may continue to exercise their voting rights, as set forth above, at each annual meeting of the stockholders of the Corporation occurring during such Default Period. During any Default Period, no Preferred Stock Director may be removed from office without the vote or consent of the holders of a majority of the number of shares of the Senior Preferred Stock at the time outstanding. If at any time during a Default Period the directorship of the Preferred Stock Director is vacant, the secretary of the Corporation shall, upon the written request of the holders of shares representing at least a majority of the Senior Preferred Stock then outstanding, call a special meeting of all of the stockholders at the expense of the Corporation, upon the notice required for special meetings of stockholders. At any meeting held for the purpose of electing directors at which the holders of the Senior Preferred Stock shall have the right, voting as a class, to elect the Preferred Stock Director, the presence, in person or by proxy, of the holders of a majority of the Senior Preferred Stock then outstanding shall be required to constitute a quorum of the Senior Preferred Stock on such election. At any such meeting or adjournment thereof, the absence of the quorum of the Senior Preferred Stock shall not prevent the election of directors other than the Preferred Stock Director, and the absence of a quorum for the election of such other directors shall not prevent the election of the Preferred Stock Director, and in the absence of either or both such 10 quorums, a majority of the holders present in person or by proxy of the stock which lacks a quorum shall have the power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present. A vacancy in the directorship of the Preferred Stock Director may be filled only by the vote or written consent of the holders of a majority of the shares of the outstanding Senior Preferred Stock. Upon termination of a Default Period, the term of office of the then Preferred Stock Director shall automatically terminate, the shares of Senior Preferred Stock shall cease to have the voting rights specified in this Section A.6(b), the number of directors constituting the Board of Directors of the Corporation shall be automatically reduced to eliminate the vacancy caused by the termination of the office of the Preferred Stock Director and all voting rights shall be vested exclusively in the holders of shares of Common Stock, subject to the revesting of voting rights in the shares of Senior Preferred Stock in the event of the beginning of another Default Period. 7. Amendment. This certificate of incorporation of the Corporation shall not be amended in any manner which would alter or change the power, preferences or special rights of the Senior Preferred Stock so as to affect them adversely (including, without limitation, providing for the creation of any new class of capital stock senior to, or on a parity with, the Senior Preferred Stock as to dividends, redemption rights or on liquidation) without the affirmative vote of the holders of at least a majority of the outstanding shares of Senior Preferred Stock, voting together as a single class. The Board of Directors reserves the right to act by resolution from time to time to decrease the number of shares which constitute Senior Preferred Stock (but not below the number of shares thereof outstanding)." (ii) Part B of Article FOURTH is hereby eliminated in its entirety and replaced with the following: "PART B. - Intentionally Omitted" Any references in the Certificate of Incorporation of the Corporation to such Part B or the Junior Preferred Stock are hereby eliminated. Except to the extent specifically provided to the contrary in this Certificate of Amendment, the terms, provisions and conditions of the Certificate of Incorporation of the Corporation shall remain unamended and in full force and effect. This Certificate of Amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 11 IN WITNESS WHEREOF, MONTGOMERY WARD HOLDING CORP. has caused this certificate to be signed by Bernard F. Brennan, its Chairman of the Board, and attested by Spencer H. Heine, its Secretary, this 27th day of April, 1994. MONTGOMERY WARD HOLDING CORP. /s/ Bernard F. Brennan By:-------------------------- Bernard F. Brennan Chairman of the Board (CORPORATE SEAL) ATTEST: /s/ Spencer H. Heine By:------------------------ Spencer H. Heine Secretary 12 EX-3.2(III) 3 EXHIBIT 3.2(III) Exhibit 3.2(iii) STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ________________________________ I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "MONTGOMERY WARD HOLDING CORP.", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY OF JUNE, A.D. 1994, AT 4 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS FOR RECORDING. (Logo of William T. Quillen) ------------------------------------- William T. Quillen, Secretary of State AUTHENTICATION: 7166040 DATE: 06-29-94 THIRD ----- RESTATED -------- CERTIFICATE OF INCORPORATION ---------------------------- OF -- MONTGOMERY WARD HOLDING CORP. ----------------------------- MONTGOMERY WARD HOLDING CORP., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: 1. The original Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on February 8, 1988 and recorded in the Office of the Recorder of Kent County, Delaware. 2. The Certificate of Correction of Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on February 9, 1988. 3. The original Restated Certificate of Incorporation was filed in the office of the Secretary of State of Delaware on June 17, 1988 and amendments thereto were filed on each of June 20, 1988; June 24, 1988; January 30, 1990; and March 20, 1992. 4. The Second Restated Certificate of Incorporation of the Corporation was filed in the office of the Secretary of State of Delaware on June 25, 1992. 5. An amendment to the Second Restated Certification of Incorporation of the Corporation was filed in the office of the Secretary of State of Delaware on April 27, 1994. 6. The Board of Directors of the Corporation, by unanimous consent of its members, filed with the minutes of the Board of Directors, adopted resolutions proposing and declaring advisable the Third Restated Certificate of Incorporation of the Corporation as follows, consisting of Articles First through Tenth and the amendments reflected therein: FIRST: THE NAME OF THE CORPORATION IS: MONTGOMERY WARD HOLDING CORP. SECOND: The address of its registered office in the State of Delaware is 32 Lockerman Square, Ste. L-100, in the City of Dover 19901, County of Kent. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation are to conduct any lawful business, to exercise any lawful purpose and power, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same may be amended from time to time ("GCL"). FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is fifty-five million eight hundred twelve thousand seven hundred fifty (55,812,750) consisting of the following amounts in the following designations: 1. Common Stock. Fifty-five million eight hundred twelve thousand (55,812,000) shares of Common Stock, par value one cent ($0.01) per share (hereinafter referred to as "Common Stock"), which shall consist of the following classes: (a) thirty million eight hundred twelve thousand (30,812,000) shares of Class A Common Stock (hereinafter referred to as "Class A Common Stock"), which shall consist of the following series: (i) twenty-five million (25,000,000) shares of Class A Common Stock, Series 1 (hereinafter referred to as "Class A Common Stock, Series 1"), and (ii) five million four hundred twelve thousand (5,412,000) shares of Class A Common Stock, Series 2 (hereinafter referred to as "Class A Common Stock, Series 2"), and (iii) four hundred thousand (400,000) shares of Class A Common Stock, Series 3 (hereinafter referred to as "Class A Common Stock, Series 3"), and (b) twenty-five million (25,000,000) shares of Class B Common Stock (hereinafter referred to as the "Class B Common Stock"). 2. Preferred Stock. Seven hundred fifty (750) shares of Preferred Stock, par value one dollar ($1.00) per share (hereinafter referred to as "Preferred Stock" or "Senior Preferred Stock"). Such shares of Common Stock and Preferred Stock may be issued for such consideration, not less than the par value thereof, as shall be fixed from time to time by the Board of Directors, and shares issued for not less than the consideration so fixed shall be fully paid and non-assessable. A statement of the powers, preferences, rights, qualifications, limitations, restrictions and the relative, participating, optional and other special rights in respect of the shares of each class or series of stock is as follows: PART A. SENIOR PREFERRED STOCK ------------------------------ Except as otherwise provided herein, each share of Senior Preferred Stock shall be identical in all respects to all other shares of Senior Preferred Stock and shall entitle the holder thereof to the same rights and privileges as to which the holders of the other shares of Senior Preferred Stock are entitled. 1. Rank. The Senior Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to the Common Stock. 2 2. Dividends. (a) In each year, the holders of the shares of Senior Preferred Stock shall be entitled to receive, before any dividends shall be declared and paid upon or set aside for the Common Stock, when and as declared by the Board of Directors, except as may be prohibited by Section A.5, out of funds legally available for that purpose, cumulative cash dividends at the annual rate of four thousand eight hundred fifty dollars ($4,850) per share (the "Dividend Rate"), and no more, in equal quarterly payments of one thousand two hundred twelve dollars and fifty cents ($1,212.50) per share, on the last business day of March, June, September and December (each of such dates being a "Dividend Payment Date"), commencing with the Dividend Payment Date in June, 1994. The dividend payable on the Dividend Payment Date in June, 1994 with respect to any share of Senior Preferred Stock shall be the pro rata amount of the Dividend Rate based upon the number of days from and including the date of first issuance (the "Issuance Date") of the Senior Preferred Stock up to and including the Dividend Payment Date in June, 1994 and a 365-day year. (The period from the Issuance Date to the first Dividend Payment Date, and each quarterly period between consecutive Dividend Payment Dates, shall hereinafter be referred to as a "Dividend Period.") Such dividends shall be paid to the holders of record at the close of business on the date specified by the Board of Directors of the Corporation at the time such dividend is declared; provided, however, that such date shall not be more than sixty (60) days nor less than ten (10) days prior to the respective Dividend Payment Date. Dividends on the Senior Preferred Stock shall be cumulative from the Issuance Date (whether or not there shall be net profits or net assets of the Corporation legally available for the payment of such dividends), so that: (i) except as provided in Section A.2(a)(ii), the Corporation shall not take any of the following actions: (A) declare, order or pay any dividend on any class of stock ranking as to dividends or on liquidation junior to the Senior Preferred Stock (such junior stock being herein sometimes referred to as the "Stock Junior to the Senior Preferred Stock"), or (B) redeem any Stock Junior to the Senior Preferred Stock. (each of such actions described in clauses A.2(a)(i)(A) or (B) above being herein sometimes referred to as a "Junior Distribution" and the proposed date of each such action being herein sometimes referred to as a "Proposed Junior Distribution Date") if the Corporation shall not, on or before the Proposed Junior Distribution Date, have completed both of the following: 3 (1) declared on the outstanding shares of Senior Preferred Stock, and paid or set apart for payment, all "Accrued Dividends" (defined in Section A.4(c)(i)) to the Proposed Junior Distribution Date; and (2) paid or deposited as required in this Part A all amounts payable to holders of Senior Preferred Stock in respect of all mandatory redemptions required to have been paid or deposited for their benefit on or before the Proposed Junior Distribution Date; and (ii) the Corporation may redeem or purchase any shares of Common Stock in accordance with either (x) the terms, conditions and provisions of the "Stockholders' Agreement" (defined in Section B.1) or (y) the terms, conditions and provisions of the "Employee Stock Option Plan" (defined in Section B.1), if on or before the date of each such proposed Common Stock redemption or purchase (each such time, with respect to redemptions or purchases under either the Stockholders Agreement or the Employee Stock Option Plan, being herein sometimes referred to as a "Proposed Common Stock Repurchase Date"), the Corporation shall have: (A) declared on the outstanding shares of Senior Preferred Stock, and paid or set apart for payment, all Accrued Dividends (defined in Section A.4(c)(i)) through all Dividend Payment Dates occurring on or prior to such Proposed Common Stock Repurchase Date, and (B) paid or deposited as required in this Part A all amounts payable to holders of Senior Preferred Stock in respect of all mandatory redemptions required to have been paid or deposited for their benefit on or before all "Mandatory Redemption Dates" (defined in Section A.4(a)(i)) occurring on or prior to such Proposed Common Stock Repurchase Date. All dividends declared upon Senior Preferred Stock and any other class of stock ranking on a parity as to dividends with the Senior Preferred Stock shall be declared pro rata per share. Accrued but unpaid dividends shall not bear interest. (b) Each fractional share of the Senior Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends to which each outstanding full share of the Senior Preferred Stock is entitled pursuant to Section A.2(a) hereof, and all of such dividends with respect to such outstanding fractional shares shall be fully cumulative and shall accrue 4 (whether or not declared) and shall be payable in the same manner and at such times as provided for in Section A.2(a) with respect to dividends on each outstanding full share of the Senior Preferred Stock. 3. Rights on Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of shares of Senior Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, except as may be prohibited by Section A.5, but before any payment shall be made to the holders of any stock ranking on liquidation junior to the Senior Preferred Stock, an amount equal to one hundred thousand dollars ($100,000) per share, plus an amount equal to Accrued Dividends (as defined in Section A.4(c)(i)) to the date of payment (the "Liquidation Payment"). If upon any liquidation, dissolution or winding up of the Corporation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Senior Preferred Stock the full amounts to which they respectively shall be entitled, the holders of shares of Senior Preferred Stock, and any class of stock ranking on liquidation on a parity with the Senior Preferred Stock, shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. In the event of any liquidation, dissolution or winding up of the Corporation after payment shall have been made to the holders of shares of Senior Preferred Stock and any class of stock ranking on liquidation on a parity with the Senior Preferred Stock of the full amount to which they shall be entitled as aforesaid, the holders of any class or classes of stock ranking on liquidation junior to the Senior Preferred Stock shall be entitled, to the exclusion of the holders of shares of Senior Preferred Stock, to share, according to their respective rights and preferences, in all remaining assets of the Corporation available for distribution to its stockholders. (b) The Liquidation Payment with respect to each fractional share of the Senior Preferred Stock outstanding or accrued but unpaid, shall be equal to a ratably proportionate amount of the Liquidation Payment with respect to each outstanding share of Senior Preferred Stock. (c) For the purposes of this Section A.3, neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets shall be deemed to be a liquidation, dissolution or winding up of the Corporation, unless such transaction shall be in connection with the liquidation, dissolution or winding up of the Corporation. 5 4. Redemption. (a) Mandatory Redemption. (i) The holders of not less than a majority of the outstanding shares of Senior Preferred Stock may, by notice served on the Corporation, require the Corporation to redeem, on the date which is four (4) months after the effective date of such notice, but not prior to the date which is one day after the fifth anniversary of the Issuance Date, all or any portion, as set forth in such notice, of the outstanding shares of Senior Preferred Stock at a redemption price of (A) one hundred thousand dollars ($100,000) per share (payable in cash or other consideration as the Corporation and holders of a majority of the Senior Preferred Stock may agree), plus (B) an amount equal to Accrued Dividends (defined in Section A.4(c)(i)) to the date of payment (the "Redemption Price") (each such date being herein sometimes referred to as a "Mandatory Redemption Date"). Such notice may be given from time to time with respect to any partial or full redemptions. Notice of every redemption pursuant to this Section A.4(a) shall be personally delivered or sent by certified mail, postage prepaid and return receipt requested, to the Corporation at the address of its principal executive offices to the attention of its Secretary. Such notice shall be effective upon receipt by the Corporation. The procedures set forth in Section A.4(b)(i) shall be followed for partial redemptions. (ii) On and after any Mandatory Redemption Date (unless default shall be made by the Corporation in depositing moneys for the payment of the Redemption Price as hereinafter provided), all rights of the holders of shares of Senior Preferred Stock as stockholders of the Corporation with respect to those shares of Senior Preferred Stock to be redeemed, except the right to receive the Redemption Price as hereinafter provided, shall cease and terminate. (iii) The Corporation shall provide moneys for the payment of the Redemption Price by depositing on the Mandatory Redemption Date the amount thereof for the account of the holders of record of the Senior Preferred Stock entitled thereto with the Continental Bank N.A., or such other bank or trust company doing business in the City of Chicago, as may be designated by (A) the holders of not less than a majority of the outstanding shares of Senior Preferred Stock, and, failing said designation. (B) the Corporation, as paying agent for the benefit of such holders. The holders of the shares of Senior Preferred Stock redeemed shall surrender to the Corporation the certificates for the shares of Senior Preferred Stock so redeemed. Upon notification by such designated bank or trust company to the holders of the Senior Preferred Stock 6 that such moneys representing the Redemption Price have been deposited by the Corporation, the shares designated for redemption shall no longer be outstanding, whether or not the certificates for the shares so redeemed have been received by the Corporation on the date of such notification and all rights relating thereto shall cease and terminate. (b) Optional Redemption. (i) So long as any shares of Senior Preferred Stock are outstanding, except as may be prohibited by Section A.5, the Corporation may, at the option of the Board of Directors, at any time or from time to time after the Issuance Date, redeem the whole or any part of such Senior Preferred Stock. Any redemption pursuant to this Section A.4(b)(i) shall be at the Redemption Price. If less than all the shares of Senior Preferred Stock at any time outstanding shall be called for redemption, the redemption shall be made pro rata with respect to such shares and in such manner as may be prescribed by resolution of the Board of Directors. The date of each such redemption is herein sometimes referred to as an "Optional Redemption Date". (ii) Notice of every redemption pursuant to this Section A.4(b) shall be sent by first-class mail, postage prepaid, to the holders of record of the shares of Senior Preferred Stock so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. Such notice shall be mailed not less than ten (10) business days in advance of the Optional Redemption Date to the holders of record of the shares of Senior Preferred Stock so to be redeemed. On and after the Optional Redemption Date, unless default shall be made by the Corporation in providing moneys to the bank or trust company for the account of the holders of record of the Senior Preferred Stock as provided in Section A.4(a)(iii) for the payment of the Redemption Price, all rights of the holders of Senior Preferred Stock as stockholders of the Corporation with respect to those shares of Senior Preferred Stock to be redeemed, except the right to receive the Redemption Price, shall cease and terminate whether or not the certificates for the shares so redeemed have been received by the Corporation as provided in Section A.4(a)(iii). In this Section A.4(b)(ii), a business day refers to any day, except a Saturday, Sunday or any day on which banks in the City of Chicago are authorized or required by law to close. (c) Definitions. (i) The term "Accrued Dividends" with respect to the Senior Preferred Stock shall mean, as of any given time, the then "Full Cumulative Dividends" (defined in Section A.4(c)(ii)) less the 7 amount of all dividends theretofore paid upon the relevant shares of Senior Preferred Stock. (ii) The term "Full Cumulative Dividends" with respect to the Senior Preferred Stock shall mean (whether or not in any Dividend Period, or any part thereof, in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends upon the relevant shares at the full rate fixed for Senior Preferred Stock as provided herein for the period of time elapsed from the date of issuance thereof to the date as of which Full Cumulative Dividends are computed. (d) Shares of Senior Preferred Stock which have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall not be reissued. (e) Each fractional share of the Senior Preferred Stock outstanding shall be entitled to a ratably proportionate fraction of the Redemption Price payable in respect of each outstanding full share of the Senior Preferred Stock pursuant to this Section A.4, and such fraction of the price shall be payable in the same manner and at such times as provided for in this Section A.4 with respect to redemptions of each outstanding full share of the Senior Preferred Stock. (f) The foregoing provisions of this Section A.4 to the contrary notwithstanding but without limitation of the Corporation's obligations to make mandatory redemptions as required by Section A.4(a), unless the Accrued Dividends on all outstanding shares of Senior Preferred Stock shall have been paid or contemporaneously are declared and paid through the date of a proposed optional redemption, none of the shares of Senior Preferred Stock shall be redeemed unless all outstanding shares of Senior Preferred Stock are simultaneously redeemed and the Corporation shall not purchase by optional redemption or otherwise acquire any shares of Senior Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Senior Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Senior Preferred Stock. (g) If fewer than all the outstanding shares of Senior Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors in accordance with the provisions of this Part A, and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors. 5. Restriction on Payments. Anything contained in this Article to the contrary notwithstanding, no cash dividends or dividends paid by transfer of any other property on shares of the Senior Preferred Stock shall be declared by the 8 Board of Directors or paid or set apart for payment by the Corporation, no distribution in respect of the Senior Preferred Stock shall be paid or set apart for payment by the Corporation, and no payment shall be made by the Corporation with respect to any redemption of the Senior Preferred Stock (such payments, distributions and settings aside being herein sometimes referred to collectively as "Distributions") at any time when the terms and provisions of any agreement to which the Corporation or any other member of the "Ward Group" (defined in Section B.1) is a party relating to indebtedness for money borrowed specifically prohibits or limits such Distribution (and such Distribution exceeds said limits), or such Distribution would constitute a breach, default or event of default thereunder. 6. Voting Rights. (a) Except as expressly provided in Section A.6(b) or elsewhere in this certificate of incorporation or as required by law (in relation to which the holders of shares of Senior Preferred Stock shall be treated as a class), the holders of shares of Senior Preferred Stock shall not have voting rights and at every meeting of the stockholders of the Corporation, or by written consent in lieu of any such meeting, all voting power in the election of directors and/or for all other purposes shall be vested exclusively in the holders of shares of Common Stock. Without limitation of the next preceding sentence and without implication that the contrary would otherwise be true, no consent of the holders of Senior Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation of any class of stock of the Corporation junior in right as to dividends and upon liquidation to the Senior Preferred Stock, or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof. (b) Anything elsewhere in this certificate of incorporation to the contrary notwithstanding, if (i) Accrued Dividends on the Senior Preferred Stock are not paid in full on any of four (4) consecutive Dividend Payment Dates, or (ii) the Corporation shall have failed to effect the redemption of shares of Senior Preferred Stock on a Mandatory Redemption Date as required in Section A.4(a), the holders of shares of Senior Preferred Stock shall have voting rights as specified in this Section A.6(b). In the event of the occurrence of either of the foregoing events, such occurrence shall mark the beginning of a period (the "Default Period") which shall continue until such time as (i) Accrued Dividends on the Senior Preferred Stock have been paid in full through the date of payment, or (ii) the failure to redeem shares of Senior Preferred Stock as required by Section A.4(a) has been cured by the Corporation. Any provision of the by-laws of the Corporation to the contrary notwithstanding, during any Default Period, the holders of shares of the Senior Preferred Stock then outstanding shall have the exclusive and special right (but not the obligation), voting separately as a class (each share of Senior Preferred Stock being entitled to one (1) vote), to elect one (1) director to the Board of Directors of the Corporation (the "Preferred Stock Director") and the number of directors constituting the Board of Directors 9 of the Corporation shall be automatically increased in order to provide one (1) vacancy for the Preferred Stock Director. Upon written request, made at any time after the beginning of the Default Period, by the holders of not less than a majority of the shares of the Senior Preferred Stock then outstanding, the Corporation shall call a special meeting of all of the stockholders of the Corporation, at which meeting the holders of shares of Senior Preferred Stock, voting separately as a class, shall elect the Preferred Stock Director as set forth above; provided, however, that if such meeting shall not have been called by the Corporation within ten (10) days after the beginning of a Default Period, such meeting may be called, upon like notice, at the expense of the Corporation, by the holders of not less than a majority of the outstanding shares of Senior Preferred Stock. After the first such election during any Default Period, the holders of the shares of Senior Preferred Stock, voting separately as a class, may continue to exercise their voting rights, as set forth above, at each annual meeting of the stockholders of the Corporation occurring during such Default Period. During any Default Period, no Preferred Stock Director may be removed from office without the vote or consent of the holders of a majority of the number of shares of the Senior Preferred Stock at the time outstanding. If at any time during a Default Period the directorship of the Preferred Stock Director is vacant, the secretary of the Corporation shall, upon the written request of the holders of shares representing at least a majority of the Senior Preferred Stock then outstanding, call a special meeting of all of the stockholders at the expense of the Corporation, upon the notice required for special meetings of stockholders. At any meeting held for the purpose of electing directors at which the holders of the Senior Preferred Stock shall have the right, voting as a class, to elect the Preferred Stock Director, the presence, in person or by proxy, of the holders of a majority of the Senior Preferred Stock then outstanding shall be required to constitute a quorum of the Senior Preferred Stock on such election. At any such meeting or adjournment thereof, the absence of the quorum of the Senior Preferred Stock shall not prevent the election of directors other than the Preferred Stock Director, and the absence of a quorum for the election of such other directors shall not prevent the election of the Preferred Stock Director, and in the absence of either or both such quorums, a majority of the holders present in person or by proxy of the stock which lacks a quorum shall have the power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present. A vacancy in the directorship of the Preferred Stock Director may be filled only by the vote or written consent of the holders of a majority of the shares of the outstanding Senior Preferred Stock. Upon termination of a Default Period, the term of office of the then Preferred Stock Director shall automatically terminate, the shares of Senior Preferred Stock shall cease to have the voting rights specified in this Section A.6(b), the number of directors constituting the Board of Directors of the Corporation shall be automatically reduced to eliminate the vacancy caused by the termination of the office of the Preferred Stock Director and all voting rights shall be vested exclusively in 10 the holders of shares of Common Stock, subject to the revesting of voting rights in the shares of Senior Preferred Stock in the event of the beginning of another Default Period. 7. Amendment. This certificate of incorporation of the Corporation shall not be amended in any manner which would alter or change the powers, preferences or special rights of the Senior Preferred Stock so as to affect them adversely (including, without limitation, providing for the creation of any new class of capital stock senior to, or on a parity with, the Senior Preferred Stock as to dividends, redemption rights or on liquidation) without the affirmative vote of the holders of at least a majority of the outstanding shares of Senior Preferred Stock, voting together as a single class. The Board of Directors reserves the right to act by resolution from time to time to decrease the number of shares which constitute Senior Preferred Stock (but not below the number of shares thereof outstanding). PART B. COMMON STOCK ------ ------------ Except as otherwise provided in this certificate of incorporation, all shares of Class A Common Stock, Series 1, all shares of Class A Common Stock, Series 2, all shares of Class A Common Stock Series 3, and all shares of Class B Common Stock shall be identical in all respects and shall entitle the holders thereof to the same rights and privileges. 1. Adoption of Employee Stock Option Plan and Issuance of Class A Common Stock. As used herein, the terms "Ward Group" and "Employee Stock Option Plan" shall have the meanings specified in that certain Stockholders Agreement dated as of June 17, 1988 among the Corporation and certain of its stockholders, as Amended and Restated on May 20, 1994, a copy of which is on file with the secretary of the Corporation, without giving effect to any amendments of such agreement occurring after the execution and delivery of such Amendment and Restatement ("Stockholders Agreement"). The determination of the number of shares of Class A Common Stock as to which options to purchase shall be granted under the Employee Stock Option Plan, and any amendments thereto, shall require the affirmative vote of both: (a) a majority of the Board of Directors of the Corporation, and (b) the holders of a majority of the outstanding shares of Class A Common Stock, Series 1. Except for the issuance of shares of Class A Common Stock pursuant to the exercise of options granted under the Employee Stock Option Plan, the Corporation shall not issue any authorized but unissued shares of Class A Common Stock, without the affirmative vote of both: (i) two-thirds of the total number of directors of the Board of Directors of the Corporation; and (ii) the holders of a majority of the outstanding shares of Class A Common Stock. As used in this certificate of incorporation, the term "total number of directors" shall mean the total number of directors which the Corporation would have if there were no vacancies. 2. Voting Rights. (a) In General. Except as otherwise provided in Sections A.6(b) and B.2(b), each share of Common Stock shall entitle the holder thereof to vote, in person or by proxy, at any and all meetings of the stockholders of the Corporation, or by written consent in lieu thereof, on all propositions submitted to vote or 11 consent of stockholders. Any provisions of law regarding allocation of voting rights by class or series to the contrary notwithstanding, the number of votes to which holders of the Common Stock shall be entitled, without distinction as to series, shall be determined and allocated among the classes and series of Common Stock as follows: (i) The holder of each share of Class B Common Stock shall in all events be entitled to one (1) vote per share; and (ii) The holder of each share of Class A Common Stock shall be entitled to one (1) vote, or fraction thereof, per share, as follows: (A) so long as the aggregate number of outstanding shares of all series of Class A Common Stock (the "Outstanding Amount"), is less than or equal to twenty-five million (25,000,000) (such 25,000,000 being herein referred to as the "Series 1 Amount"), each share of Class A Common Stock, without distinction as to series, shall be entitled to one (1) vote per share; and (B) if the Outstanding Amount is greater than the Series 1 Amount, each share of Class A Common Stock, irrespective of series, shall be entitled to a fraction of a vote per share determined by dividing the Series 1 Amount by the Outstanding Amount. (b) Class Voting. The capitalized terms used in this Section B.2(b) which are not otherwise defined in this certificate of incorporation shall have the meanings specified in the Stockholders Agreement. In addition to the voting rights specified in Section B.2(a), the Class A Common Stock; Class A Common Stock, Series 1; and Class B Common Stock, respectively, shall be entitled to vote as separate classes in the following circumstances: (i) At such time, if any, as GE Capital and GE Capital Affiliates shall cease to own, in the aggregate, beneficially or of record, twenty percent (20%) or more of the shares of Common Stock which GE Capital and GE Capital Affiliates purchased in June 1988, the number of directors shall be automatically changed to nine (9), the holders of the Class A Common Stock, voting as a class, shall be entitled to elect seven (7) of such directors, and the holders of the Class B Common Stock, voting as a class, shall be entitled to elect two (2) of such directors; provided, however, that as long as the Account Purchase Agreement referred to in the Stockholders Agreement is in effect and GE Capital or any GE Capital Affiliate shall own beneficially or of record any shares of Class B Common Stock, GE Capital shall have the right to elect one (1) of the two (2) directors which the holders of the Class B Common Stock shall be entitled to elect and all other holders of Class B Common Stock in the aggregate shall be entitled to elect the other of the two (2) directors which the holders of Class B Common Stock shall be entitled to elect. A vacancy in the directorships to be elected, respectively, by the holders of the Class A 12 Common Stock or the Class B Common Stock may be filled only by the vote or written consent of the holders of Class A Common Stock or Class B Common Stock, as the case may be. (ii) Any amendment of this certificate of incorporation increasing the number of authorized shares of Class A Common Stock, of any series, or Class B Common Stock, shall not be adopted without the affirmative vote of the holders of a majority of both (A) the shares of Class A Common Stock, Series 1, then outstanding, and (B) the shares of Class B Common Stock then outstanding, each voting as a class. 3. Dividends. (a) In General. When and as dividends are declared thereon, whether payable in cash, property or securities of the Corporation, the holders of Common Stock shall be entitled to dividends in the proportions specified in Section B.3(b); provided, however, that if dividends are declared which are payable in shares of Class A Common Stock, Series 1; Class A Common Stock, Series 2; Class A Common Stock, Series 3; or Class B Common Stock, each such dividend shall be payable only to holders of the same class or series of Common Stock, such that dividends payable in shares of Class A Common Stock, Series 1, shall be payable only to holders of Class A Common Stock, Series 1; dividends payable in shares of Class A Common Stock, Series 2, shall be payable only to holders of Class A Common Stock, Series 2; dividends payable in shares of Class A Common Stock, Series 3, shall be payable only to holders of Class A Common Stock, Series 3; and dividends payable in shares of Class B Common Stock shall be payable only to holders of Class B Common Stock. (b) Allocation of Dividends Among Classes and Series. The term "Class A Amount" as used in this Section B.3(b) with respect to a determination of the allocation of dividends, shall mean a number of shares of Class A Common Stock equal to the Series 1 Amount or, if less, the Outstanding Amount as of the date of determination. Any provisions of law requiring allocations by class or series to the contrary notwithstanding, and except as provided in Section B.3(a), in connection with the payment of dividends, the aggregate amount which is payable to holders of Common Stock, shall be allocated among the classes and series of Common Stock as follows: (i) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination does not exceed the Series 1 Amount, shall be the amount which bears the same ratio to the total amount of such dividends as the Class A Amount bears to the sum of (A) the Class A Amount, plus (B) the number of shares of Class B Common Stock outstanding as of the date of determination; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their 13 respective holdings of shares of Class A Common Stock, without distinction as to series; (ii) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount (but the Outstanding Amount less the number of shares of Class A Common Stock, Series 3 outstanding in each case as of such date of determination (such difference being the "Non-Series 3 Outstanding Amount") does not exceed the Series 1 Amount), shall be the product of the amount which would be payable to holders of Class A Common Stock if the immediately preceding Section B.3(b)(i) were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by a fraction the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus fifty percent (50.0%) of the excess of the Outstanding Amount over the Series 1 Amount; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; (iii) The portion of such dividends which is payable to the holders of Class A Common Stock, as a class, and without distinction as to series, at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount (and Section B.3(b)(ii) immediately preceding is not applicable), shall be the product of (x) the amount which would be payable to holders of the Class A Common Stock if Section B.3(b)(i) above were applicable and the Class A Amount were equal to the Series 1 Amount, multiplied by (y) a fraction the numerator of which is the Non-Series 3 Outstanding Amount and the denominator of which is the sum of the Series 1 Amount plus eighty-one point five percent (81.5%) of the excess of the Non-Series 3 Outstanding Amount over the Series 1 Amount, and multiplied by (z) a fraction the numerator of which is the Outstanding Amount and the denominator of which is the sum of the Non-Series 3 Outstanding Amount plus fifty percent (50.0%) of the number of shares of Class A Common Stock, Series 3, outstanding as of such date of determination; and such portion of such dividends which is payable to the holders of the Class A Common Stock shall be allocated among such holders in proportion to their respective holdings of shares of Class A Common Stock, without distinction as to series; and (iv) The portion of such dividends which is payable to the holders of Class B Common Stock, as a class, shall be the portion of the total amount of such dividends which is not payable to the holders of Class A Common Stock in accordance with Section B.3(b)(i), B.3(b)(ii) or B.3(b)(iii) above, as applicable, and such portion of such dividends which is payable to the holders of the Class B Common Stock shall be allocated among such 14 holders in proportion to their respective holdings of shares of Class B Common Stock. 4. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the Corporation shall allocate the aggregate proceeds payable in liquidation of the Corporation to the holders of Common Stock in the same proportions as are specified for dividends in Section B.3(b) above. The Corporation will mail written notice of such liquidation, dissolution or winding up, not less than sixty (60) days prior to the payment date stated therein, to each record holder of Common Stock. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section unless such transaction shall be in connection with the liquidation, dissolution or winding up of the Corporation. 5. General. Except for and subject to those rights expressly granted to the holders of Senior Preferred Stock, or except as may be provided by the GCL, the holders of Common Stock shall have exclusively all other rights of stockholders including, but not by way of limitation, (i) the right to receive dividends, when, as and if declared by the Board of Directors out of assets lawfully available therefor, and (ii) in the event of any distribution of assets upon liquidation, dissolution or winding up of the Corporation or otherwise the right to receive ratably and equally all the assets and funds of the Corporation remaining after the payment to the holders of Senior Preferred Stock of the specific amounts which they are entitled to receive upon such liquidation, dissolution or winding up of the Corporation as herein provided. If the holder of any shares of Common Stock shall receive any payment of any dividend on, liquidation of, or other amounts payable with respect to, any shares of Common Stock which, in accordance with the terms of Part A of this Article FOURTH, he is not entitled to receive, he will forthwith deliver the same to the holders of shares of Senior Preferred Stock, in the form received, and until it is so delivered will hold the same in trust for such holders. FIFTH: In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. SIXTH: All power of the Corporation shall be exercised by or under the direction of the Board of Directors except as otherwise provided herein or required by law. For the management of the business and for the conduct of the affairs of the Corporation, and in further creation, definition, limitation and regulation of the power of the Corporation and of its directors and of its stockholders, it is further provided as follows: 15 1. Election of Directors. Election of directors need not be by written ballot unless the by-laws of the Corporation shall so provide. 2. Number, Tenure and Qualifications. Subject to Sections A.6(b) and B.2(b) of Article Fourth hereof, the total number of directors which shall constitute the whole board shall be fixed from time to time in the manner provided in the by-laws of the Corporation and may be increased or decreased from time to time in the manner provided in the by-laws. Subject to Section A.6(b) of Article FOURTH hereof, at each annual election of directors, the directors shall be elected to a term of office expiring at the next annual meeting of stockholders and shall hold office until heir respective successors are elected and qualified. Directors need not be stockholders or residents of Delaware but must satisfy such other qualifications as may be provided in the by-laws. 3. By-Law Amendments. The Board of Directors, by the affirmative vote of not less than two-thirds of the total number of directors of the Board of Directors, shall have power to make, alter, amend and repeal the by-laws (except to the extent that any by-laws adopted by the stockholders may expressly prohibit, or determine the minimum number of directors whose votes are required for an amendment by the Board of Directors). 4. Removal of Directors. As and to the extent provided in the by-laws and in Article Fourth hereof, the holders of Class A Common Stock and Class B Common Stock, respectively, shall be entitled to elect certain directors designated by such holders and to remove such directors with or without cause. 5. Additional Powers of Directors. In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the Board of Directors is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this certificate of incorporation, and to any by-laws from time to time made by the stockholders; provided, however, that no by-laws so made shall invalidate any prior act of the Board of Directors which would have been valid if such by-laws had not been made. SEVENTH: The Corporation shall be obligated to indemnify in accordance with the provisions of this Article Seventh: 1. Obligations to Indemnify. To the fullest extent authorized by the GCL (but in the case of any amendment of the GCL effective subsequent to June 17, 1988, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the GCL permitted the Corporation to provide prior to such amendment), the Corporation shall indemnify, hold harmless and advance expenses to each person (and, where applicable, and whether the person died testate or intestate, the personal representative of the person, the estate of such person and such person's legatees and heirs) who is or has served as director of or officer of: 16 (a) the Corporation; (b) any predecessor of the Corporation; or (c) any other enterprise at the request of the Corporation or of any predecessor of the Corporation, who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (herein referred to sometimes as a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent. Such indemnification and holding harmless shall cover all recoverable expense, liability and loss (including, without limitation, attorneys' fees, judgments,fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be an officer, director, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 2 of this Article, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred by this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the GCL requires, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer of the Corporation (and not in any other capacity in which service was rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. 2. Construction and Presumption Favoring Indemnification. In connection with each claim for indemnification, this Article shall be liberally construed in favor of indemnification and there shall be a rebuttable presumption that the Corporation shall bear the burden of proving by a preponderance of the evidence that the claimant is not so entitled to indemnification. 17 3. Right of Claimant to Bring Suit. If a claim under this Article is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid for any and all expenses incurred in prosecuting such claim. Neither of the following shall be a defense to any such action or create a presumption that the claimant has not met the applicable standard of conduct: (a) the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper; or (b) an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant was not entitled to indemnification. 4. Defense to Enforcement. It shall be a defense to any such action that the claimant has not met the standards of conduct which make it permissible for the Corporation to indemnify the claimant for the amount claimed. The burden of proving such defense shall be on the Corporation. The defense referred to in the first sentence of this Section 4 shall not be available in any action brought to enforce a claim for expense incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation. 5. Confidentiality. Any finding by the Board of Directors, independent legal counsel, or the stockholders, that a person asserting a claim for indemnification pursuant to this Article is not entitled to such indemnification, and any information which may support such finding, shall be held by the Board of Directors, independent legal counsel and the stockholders in confidence to the extent permitted by law and shall not be disclosed to any third party. If the Corporation, the Board of Directors or the stockholders are requested or required (by questions, interrogatories, subpoena, civil investigative demand or other process) to disclose any such confidential information, the person or entity so requested or required shall provide the claimant with prompt notice of each such request and shall use its best efforts to lawfully not disclose any such confidential information, including without limitation, seeking a protective order at the Corporation's expense. 6. Contract Right. The foregoing provisions of this Article shall be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while this Article is in effect. Any repeal or modification of this Article shall not impair or otherwise affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. 18 7. Indemnity of Others. The Board of Directors in its discretion shall have the power on behalf of the Corporation to enter into agreements to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he or she or his or her testate or intestate personal representative, legatees or heirs is or was an employee, agent or otherwise acting on behalf of the Corporation or a predecessor of the Corporation or serving at the request of the Corporation or its predecessor, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. 8. Non-Exclusivity. The rights of indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any rights not provided by this Article to which any director or officer may otherwise be entitled. 9. Severability. If for any reason a provision of this Article shall be deemed invalid or unenforceable, the Corporation shall remain obligated to indemnify and advance expenses pursuant to all those provisions of this Article which are valid and enforceable. 10. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the GCL. EIGHTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL or any successor provision, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article Eighth shall not adversely affect any right or protection of a director of the Corporation existing under this certificate of incorporation with respect to any act or omission occurring prior to such repeal or modification. NINTH: Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the by-laws of the Corporation. TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that to be effective, each such amendment, alteration, change or repeal must be adopted by the affirmative vote of not less than two-thirds of the total number of directors of the Board of Directors and, in the case of any amendment increasing the number of authorized shares of any class or series of Common Stock, shall 19 not be adopted without the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock, Series 1, and the holders of a majority of the outstanding shares of Class B Common Stock, each voting as a class. 7. At the annual meeting of the Stockholders of the Corporation duly called, a majority of the Stockholders of the Corporation entitled to vote have voted in favor of the aforesaid amendment and restatement of the Certificate of Incorporation. 8. This Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, MONTGOMERY WARD HOLDING CORP. has caused this certificate to be signed by Bernard F. Brennan, its Chairman of the Board, and attested by Spencer H. Heine, its Sercretary, this 20th day of May, 1994. MONTGOMERY WARD HOLDING CORP. /s/ Bernard F. Brennan By: _________________________ Bernard F. Brennan, Chairman of the Board (CORPORATE SEAL) ATTEST: /s/ Spencer H. Heine By: ___________________ Spencer H. Heine, Secretary 20 EX-3.3(I) 4 EXHIBIT 3.3(I) Exhibit 3.3(i) BY-LAWS OF MONTGOMERY WARD HOLDING CORP. (formerly BFB ACQUISITION CORP.) (Including Amendments through April 15, 1994) TABLE OF CONTENTS
Page ---- ARTICLE I Offices.................................................. 1 Section 1. Registered Office........................................ 1 Section 2. Other Offices............................................ 1 ARTICLE II Meetings of Stockholders................................. 1 Section 1. Place of Meetings........................................ 1 Section 2. Annual Meeting........................................... 1 Section 3. Notice of Annual Meeting................................. 1 Section 4. List of Stockholders..................................... 1 Section 5. Special Meetings of Stockholders......................... 2 Section 6. Procedure at Stockholders' Meetings...................... 2 Section 7. Quorum................................................... 2 Section 8. Majority Vote............................................ 2 Section 9. Proxies and Voting of Shares............................. 2 Section 10. Consents to Corporate Action............................. 3 ARTICLE III Directors................................................ 3 Section 1. Number, Tenure, Qualifications and Vacancies............. 3 Section 2. Resignations............................................. 4 Section 3. Removal of Directors..................................... 5 Section 4. General Powers........................................... 5 Section 5. Place of Meetings........................................ 5 Section 6. First Meeting of New Board............................... 5 Section 7. Regular Meetings......................................... 5 Section 8. Special Meetings......................................... 5 Section 9. Quorum................................................... 5 Section 10. Certain Supermajority Requirements....................... 6 Section 11. Informal Action By Directors............................. 9 Section 12. Telephone Meetings....................................... 9 Section 13. Designation of Committees................................ 10 Section 14. Absence of a Committee Member............................ 10 Section 15. Powers of Committees..................................... 10 Section 16. Record of Proceedings.................................... 10 Section 17. In General............................................... 10 ARTICLE IV Notices to Stockholders and Directors.................... 10 Section 1. Notice................................................... 10 Section 2. Waiver of Notice......................................... 11 ARTICLE V Officers................................................. 11 Section 1. Number and Title......................................... 11 Section 2. Election and Qualification............................... 11 Section 3. Appointment of Additional Officers....................... 11 Section 4. Compensation............................................. 11
i Section 5. Term of Office, Removal and Vacancies ................. 11 Section 6. Resignations .......................................... 11 Section 7. The Chairman of the Board ............................. 12 Section 8. The Vice Chairman of the Board ........................ 12 Section 9. President ............................................. 12 Section 10. The Vice Presidents ................................... 12 Section 11. The Secretary ......................................... 12 Section 12. Assistant Secretaries ................................. 13 Section 13. The Treasurer ......................................... 13 Section 14. Bond .................................................. 13 Section 15. Assistant Treasurers .................................. 13 ARTICLE VI Stock and Stockholders ................................ 13 Section 1. Certificate of Stock .................................. 13 Section 2. Classes and Series .................................... 14 Section 3. Signatures ............................................ 14 Section 4. Lost Certificates ..................................... 14 Section 5. Transfers of Stock .................................... 14 Section 6. Fixing Record Date .................................... 14 Section 7. Registered Stockholders ............................... 15 ARTICLE VII Indemnification ....................................... 15 ARTICLE VIII General Provisions .................................... 15 Section 1. Dividends ............................................. 15 Section 2. Checks ................................................ 15 Section 3. Fiscal Year ........................................... 15 Section 4. Seal .................................................. 15 Section 5. Certain Definitions ................................... 15 ARTICLE IX Amendments ............................................ 19 ii ARTICLE I Offices Section 1. Registered Office. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders Section 1. Place of Meetings. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the board of directors; at least ten (10) days' notice shall be given to the stockholders of the place so fixed or, in the event of the failure of the board of directors to fix such place, at the principal executive office of the corporation. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as may be fixed from time to time by the board of directors or as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. The annual meeting of stockholders shall be held on the third Thursday in May if not a legal holiday, and if a legal holiday, then on the next secular day following, at 2:00 P.M., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof, at which the stockholders shall elect by a plurality vote, subject to the provisions of Section 1 of Article III, persons to the board of directors, and transact such other business as may properly be brought before the meeting. The meeting may be adjourned from time to time and place to place until its business is completed. If the election of directors shall not be held on the day designated herein for any annual meeting, or at any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as may be convenient. Section 3. Notice of Annual Meeting. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of meeting. Section 4. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the Chicago metropolitan area, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special Meetings of Stockholders. Except as otherwise provided in the certificate of incorporation with respect to holders of preferred stock and except as otherwise provided in Section 1 of Article III of these by-laws, special meetings of stockholders of the corporation for any purpose or purposes, may be called only by the chairman of the board, the vice chairman of the board, the president, the board of directors pursuant to a resolution approved by a majority of the board of directors, or at the written request of the holders of not less than a majority of the stock entitled to vote thereat. Section 6. Procedure at Stockholders' Meetings. The order of business and all other matters of procedure at every meeting of the stockholders may be determined by the presiding officer. The board of directors may appoint two or more inspectors of election to serve at every meeting of the stockholders at which directors are to be elected. In the absence of such appointment by the board of directors, the presiding officer may appoint one or more inspectors of election to serve at any such meeting. Section 7. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by these by-laws, by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any meeting held for the purpose of electing directors at which the holders of a class of stock shall have the right, voting as a class, to elect one or more directors, the presence, in person or by proxy, of the holders of a majority of such class of stock then outstanding shall be required to constitute a quorum of such stock for such election. At any such meeting or adjournment thereof, the absence of the quorum of such class of stock shall not prevent the election of directors other than the director or directors which the holders of such stock are entitled to elect, and the absence of a quorum for the election of such other directors shall not prevent the election of the directors which the holders of such class of stock are entitled to elect, and in the absence of either or both such quorums, a majority of the holders present in person or by proxy of the stock which lacks a quorum shall have the power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement of the meeting until a quorum shall be present. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than (30) days, or if after the adjournment a new record date is fixed for the adjournment meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute, these by-laws or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. Proxies and Voting of Shares. At any meeting of the stockholders every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an 2 instrument in writing subscribed by such stockholder and bearing a date not more than three (3) years prior to said meeting, unless said instrument provides for a longer period. Unless a date shall have been fixed as a record date for the determination of its stockholders entitled to vote, no share of stock shall be voted on at any election for directors which shall have been transferred on the books of the corporation within twenty (20) days next preceding such election of directors. Section 10. Consents to Corporate Action. Any action which is required to be or may be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if consents in writing, setting forth the action so taken, shall have been signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or to take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that prompt notice of the taking of the corporate action without a meeting and by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III Directors Section 1. Number, Tenure, Qualifications and Vacancies. Subject to the provisions of the certificate of incorporation, the number of directors which shall constitute the total number of directors shall be specified in this Section 1 and shall change in accordance with the procedures specified in this Section 1. Whenever in these by-laws the vote, consent or waiver of two-thirds (2/3) of the members of the board of directors is required, the number of directors required shall be determined without regard to any vacancies on the board of directors. (a) Number of Directors. Except as otherwise provided in the other paragraphs of this Section 1, the total number of directors which shall be elected by the stockholders shall be nine (9), of which five (5) shall be designated by the "Designator" (defined in Article VIII) and four (4) shall be designated by "GE Capital" (defined in Article VIII). (b) Change in Control Upon 50% GE Capital Common Stock Ownership Change. At such time, if any, as GE Capital and "GE Capital Affiliates" (defined in Article VIII) shall cease to own, in the aggregate, more than fifty percent (50%) of the "Shares" (defined in Article VIII) which GE Capital and GE Capital Affiliates have purchased on or about the date as of which the "Stockholders' Agreement" (defined in Article VIII) was executed and delivered, the number of directors which the Designator shall have the right to designate shall be increased by one (1) and the number of directors which GE Capital shall have the right to designate shall be reduced by one (1). The Designator shall designate the director to be elected, and GE shall designte the director to be removed and shall effect such removal. (c) Election of Directors After Substantial Reduction of GE Capital Class B Common Stock Ownership. Upon the happening of the events provided for in Section B.2(b) of ARTICLE FOURTH of the certificate of incorporation, the total number of directors shall be automatically changed to nine (9) (not including the "Preferred Stock Director," if any, referred to in paragraph (e) of this Section 1) and the holders of the Class A Common 3 Stock then outstanding, voting as a class, shall be entitled to elect seven (7) of such directors, and the holders of the Class B Common Stock then outstanding, voting as a class, shall be entitled to elect two (2) of such directors; provided, however, that so long as the conditions specified in such Section B.2(b) with respect to the Account Purchase Agreement (defined in Section 10(t) of Article III) and the ownership of Class B Common Stock by GE Capital or any GE Capital Affiliate remain in effect, GE Capital shall have the right to elect one (1) of the two (2) directors which the holders of the Class B Common Stock shall be entitled to elect and all holders of Class B Common Stock then outstanding in the aggregate shall be entitled to elect the other one (1) of the two (2) directors which the holders of Class B Common Stock shall be entitled to elect. (d) Meetings of Stockholders. Upon the happening of any of the events described in paragraphs (b), (c) or (d) of this Section 1, in the event the board of directors shall fail to fill any vacancies resulting from the application of said paragraphs, or in the event a party shall fail to remove a director who that party was obligated to remove under the provisions of the applicable paragraph, the corporation shall call a special meeting of the stockholders at the expense of the corporation, for the purpose of electing a new slate of directors, in accordance with the appropriate designations and class voting rights, as the case may be, and the term of office of the existing directors shall terminate upon the election of their successors. If the corporation fails to so call such a special meeting, any party who is then entitled to designate directors shall have the right to call such a meeting at the expense of the corporation. (e) Preferred Stock Director. Anything elsewhere in these by-laws to the contrary notwithstanding, upon the happening, and during the continuation of the events described in Section A.6(b) of Article FOURTH of the certificate of incorporation, the holders of the Senior Preferred Stock, voting as a class, shall have the right to elect one (1) director (the "Preferred Stock Director") whereupon the total number of directors shall be automatically increased in order to provide one (1) vacancy to be filled by electing the Preferred Stock Director at a special meeting of stockholders called for that purpose. Upon the happening of the events described in such Section A.6(b) which cause the termination of the term of office of any then Preferred Stock Director, as provided in such Section A.6(b), the total number of directors shall be automatically decreased by one (1) so as to eliminate the vacancy created by the termination of the term of the Preferred Stock Director, whereupon the total number of directors shall be and remain as provided by the other provisions of this Section 1 without regard to this paragraph (e), subject to the revesting of voting rights in the shares of Senior Preferred Stock in the event of the recurrence of the events described in such Section A.6(b). (f) Designation of Replacements. At any time in which a party has the right to designate a director pursuant to this Article III, if a director who has been so designated shall cease to serve as such (other than by reason of his removal as provided in this Article III), the party who designated that director shall have the right to designate his replacement. At any time in which no party has the right to designate directors pursuant to this Article III, vacancies shall be filled in the manner provided in the Delaware GCL. Section 2. Resignations. Any director may resign at any time by giving written notice to the board of directors, the chairman of the board, the vice chairman of the board, the 4 president or the secretary of the corporation. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. Section 3. Removal of Directors. At all times when any party or the holders of any class of stock have the right to designate any director(s) or to elect, as a class, any director(s), only such party or class, as the case may be, who had the right to designate director(s) or to elect director(s) shall have the right to remove such director(s), which removals may be effected with or without cause at any special or annual meeting of stockholders or by written consent in lieu of a meeting. At all other times, the right of the stockholders to remove any director shall be as provided in the applicable provisions of the Delaware GCL. Section 4. General Powers. The business and affairs of the corporation shall be managed by or under the direction of the board of directors which may exercise all such powers of the corporation and do all such lawful acts as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. Meetings of the Board of Directors ---------------------------------- Section 5. Place of Meetings. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 6. First Meeting of New Board. The first meeting of the board of directors after each election of new directors thereto shall be held at such time and place as shall be specified in a notice given as provided in these by-laws for special meetings of the board of directors, or as shall be specified in a written waiver of notice signed by all of the directors. Section 7. Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 8. Special Meetings. Special meetings of the board of directors may be called by the president. Upon the request in writing of two (2) or more directors, the president or any other officer of the corporation shall call a special meeting of the board of directors, notice of which shall be given to each director at his usual place of business, or at such other address as shall have been furnished by him for such purpose. Such notice shall be given at least forty-eight (48) hours before the meeting by telephone or by being personally delivered, mailed or telegraphed, provided, that, if mailed, notice shall be deemed effective upon receipt. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Section 9. Quorum. At all meetings of the board of directors, a majority of the board of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 5 Section 10. Certain Supermajority Requirements. The affirmative vote of not less than two-thirds (2/3) of the members of the board of directors of the corporation (but, in the case of paragraph (t) of this Section 10, instead of the aforesaid two-thirds (2/3) requirement, the affirmative vote of a majority of the directors designated by the Designator or, at any time in which class voting is in effect as proved in the certificate of incorporation, by a majority of the directors elected by the holders of Shares of Class A Common Stock) shall be required in order for the corporation to take, or permit any member of the "Ward Group" (defined in Article VIII) to take, any of the following actions: (a) a merger, consolidation or other business combination (other than among members of the Ward Group and other than as part of an acquisition of assets permitted pursuant to paragraph (m) of this Section 10)); (b) any of the following sales (other than intercompany sales within the Ward Group, sales solely of inventory in the ordinary course of business, and sale and leaseback transactions in the ordinary course of business or, to the extent out of the ordinary course of business, consistent with the past practices of the Ward Group): (i) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the corporation) where the gross proceeds of sale (exclusive of assumption of liabilities) are in an amount equal to the greater of (A) fifty million dollars ($50,000,000) or (B) twenty percent (20%) of the amount of the consolidated common stockholders' equity of the corporation as of the time of the sale; or (ii) any sale of assets of the Ward Group (including assets consisting of shares of stock of a subsidiary of the corporation) to the extend the gross proceeds of sale (exclusive of assumption of liabilities), when added to the gross proceeds of all other sales of assets of the Ward Group (exclusive of assumption of liabilities) occurring during that fiscal year, exceed an amount equal to the greater of (A) one hundred million dollars ($100,000,000) or (B) thirty percent (30%) of the amount of consolidated common stockholders' equity of the corporation as of the time of the sale; provided, however, that notwithstanding the foregoing limitation, any single sale of assets for gross procceeds not exceeding one million dollars ($1,000,000) (exclusive of assumption of liabilities) shall be excluded from the foregoing computation; (c) amendments to the certificate of incorporation or by-laws of the corporation (other than amendments to the by-laws permitted pursuant to Section 8.2 of the Stockholders' Agreement); (d) payment of dividends on Shares (other than intercompany dividends among members of the Ward Group); (e) redemptions of Shares, other than pursuant to the provisions of the Stockholders' Agreement or the "Employee Stock Option Plan" (defined in Article VIII); (f) public or private offerings of debt or equity securities of any member of the Ward Group, other than to other members of the Ward Group, pursuant to the Employee Stock Option Plan or pursuant to Section 3.14 or Section 6.1 (with respect to the offering of Shares in "Demand Registrations") (as defined in the Stockholders' Agreement) on behalf of those Persons exercising 6 their demand registration rights thereunder and Section 6.2 with respect to the offering of Shares in "Piggyback Registrations" (as defined in the Stockholders' Agreement) on behalf of those Persons exercising their piggyback registration rights thereunder) of the Stockholders' Agreement; (g) guarantees of any indebtedness in excess of five million dollars ($5,000,000) for borrowed money of any Person other than a member of the Ward Group; (h) setting of annual financial goals and targets; (i) the making of, or the entry into a binding commitment to make, any capital expenditures which would cause the amount expended (or committed to be expended) by the Ward Group for capital expenditures during a fiscal year to exceed the capital expenditure budget to be contained in the annual financial goals and targets of the Ward Group for such year by more than ten percent (10%) of the budgeted amount; (j) borrowings by any member of the Ward Group which would cause the aggregate consolidated indebtedness of the corporation for money borrowed to exceed an amount equal to twenty-five million dollars ($25,000,000), plus five percent (5%) of the amount of the consolidated common stockholders' equity of the corporation measured at the time of such borrowings, but in determining both the amount of such borrowings and the necessity for approval of two-thirds (2/3) of the members of the board of directors, the following borrowings shall be excluded: (i) borrowings made in connection with the acquisition, pursuant to the Purchase Agreement (defined in Article VIII) of Ward, and under the term loan, revolving credit, tax standby letter of credit, "Tax Loan" and commercial letter of credit facilities established in connection with such acquisition, borrowings pursuant to the Subordinated Loan Agreement dated June 23, 1988, borrowings of any members of the Ward Group existing at the time of such acquisition, and borrowings made under any whole or partial refunding or replacement thereof without increasing the principal amount thereof, other than increases for closing costs (including, with limitation, prepayment penalties) incurred in connection with such refunding or replacement; (ii) purchase money financing incurred in accordance with the annual financial goals and targets of the Ward Group, and purchase money financing in connection with the issuance of notes pursant to Sections 3.8 and 3.9 of the Stockholders' Agreement or Sections 3.6 and 3.7 of the Terms and Conditions (defined in Article VIII); it being understood that purchase money financing shall include financing, refinancing or funding of the acquisition price of real property (or any interest therein) or other fixed assets acquired hereafter by a member of the Ward Group, regardless of whether said financing, refinancing or funding is done at the time of, or subsequent to, the acquisition of any such real property (or interest therein) or other fixed assets; (iii) borrowings made to cure any default referred to in paragraphs (r) (i) and (ii) of Section 1.2 of the Stockholders' Agreement; (iv) borrowings made for the purpose of redeeming any of the Preferred Stock; or 7 (v) borrowings made pursuant to Section 4.4 of the Stockholders' Agreement; (k) increases in compensation and/or fringe, welfare or pension benefits for any member of the Executive Committee of the Ward Group, other than in accordance with the practices and guidelines of the Ward Group in effect from time to time (it being understood that any material change from the current practices and guidelines shall require the affirmative vote of two-thirds (2/3) of the members of the board of directors), but in no event beyond the increases being given for comparable executives in comparable retail businesses, determined from published survey data and guidelines; (l) adoption of a plan of liquidation of the corporation; (m) acquisition of assets (other than purchases of inventory and capital expenditures) which would cause the amount expended (or committed to be expended) by the Ward Group for the acquisition of such assets during a fiscal year to exceed the budget for acquisitions of such assets to be contained in the annual financial goals and targets of the Ward Group for such year by more than ten percent (10%) of the budgeted amount; (n) entry into any transaction (exclusive of compensation and fringe, welfare and pension benefit arrangements with affiliates who are officers, directors or employees of the Ward Group for services rendered by them to the Ward Group) with an affiliate, as that term is defined in the "Act" (defined in Article VIII), other than affiliates constituting members of the Ward Group; (o) seeking of a consent or waiver from a lender to a member of the Ward Group whose loan to the member of the Ward Group has a then outstanding principal balance in excess of thirty million dollars ($30,000,000), in any case in which consent or waiver is required for the entry into a transaction by the Ward Group and which, in the absence of such consent or waiver, would constitute a default or an event of default under the documents evidencing or pertaining to the loan made by the lender, other than any consent or waiver required in connection with: (i) the making of any borrowing permitted pursuant to paragraph (j)(ii), (iii), (iv) or (v); (ii) any mandatory prepayment obligation arising from the sale or financing of any real property (or interests therein) or other fixed assets; (iii) any prepayment occurring by reason of a "Change of Control" (as defined in one or more of the loan documents evidencing the loans referred to in subparagraph (j)(i) made in connection with the acquisition of Ward by the corporation); or (iv) the incurring of any liens (other than for money borrowed). provided, however, that approval of two-thirds (2/3) of the members of the board of directors for the seeking of such consent or waiver shall not be required if the transaction for which such consent or waiver is being sought (x) is specifically permitted pursuant to any of the other paragraphs of this Section 10 without the approval of two-thirds (2/3) of the members of the board of directors, or (y) has been authorized by two-thirds (2/3) of the members of the board of directors pursuant to any of said other paragraphs; 8 (p) authorizing a Transfer of Shares pursuant to Section 2.2(a) of the Stockholders' Agreement in a case where the transferee is not a Management Shareholder, a Permitted Transferee (as defined in the Stockholders' Agreement), or a present or prospective employee of the Ward Group; (q) a waiver of the prohibitions on Transfers of Shares contained in Sections 2.3(a) and (c) of the Stockholders' Agreement, as applied to Brennan; provided, however, that by action of a simple majority of the members of the board of directors, the references in those paragraphs of the third anniversary may be amended to constitute references to the second anniversary; (r) a waiver of the prohibitions on Transfers of Shares contained in Section 2.3(e) of the Stockholders' Agreement; (s) any determination, pursuant to Section 4.3 of the Stockholders' Agreement, of a Cash Payments Limitation (as therein defined) other than that expressly set forth in that Section; (t) without limiting the generality of any other provision of this Section 10, any of the following actions with respect to that certain Account Purchase Agreement referred to in the Stockholders' Agreement: (i) termination thereof by agreement of the parties thereto; (ii) the exercise of a unilateral right of termination and the exercise of all other rights, options and elections granted thereunder to Ward; (iii) the giving of waivers and consents with respect thereto; and/or (iv) any amendment thereto; or (u) the termination for Cause (as defined in the Stockholders' Agreement) of Brennan's employment with any member of the Ward Group. Section 11. Informal Action By Directors. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 12. Telephone Meetings. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 9 Committees of Directors ----------------------- Section 13. Designation of Committees. The board of directors may, by resolution passed by a majority of the board of directors, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board amy designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Section 14. Absence of a Committee Member. In the absence or disqualification of any member of a committee or committees or in the event that any such member is unable or refuses to act, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such member. Section 15. Powers of Committees. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that no such committee shall (i) take any of the actions specified in Section 10 of this Article III which require the affirmative vote of not less than two-thirds (2/3) of the total number of directors of the board of directors of the corporation, or (ii) take any action or do anything in the exercise of any power or authority in excess of that permitted to be taken by a committee of directors under any applicable provisions of the Delaware GCL. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Section 16. Record of Proceedings. Each committee shall keep regular minutes of its proceedings and report the same to the board of directors when required. Compensation of Directors ------------------------- Section 17. In General. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may by paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as a director. No payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV Notices to Stockholders and Directors Section 1. Notice. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, telegraph or confirmed facsimile, addressed to such director or stockholder, at such 10 address as appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail, telegraphed or received through a telecopy or telex machine, as the case may be. Notice to directors may also be given as provided in Section 8 of Article III. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V Officers Section 1. Number and Title. The officers of the corporation shall be chosen by the board of directors and shall be a chairman of the board, a vice chairman of the board, a president, a vice president, a secretary and a treasurer. The board of directors may also choose additional vice presidents and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, except that where the offices of president and secretary are held by the same person, such person shall not hold any other office. Section 2. Election and Qualification. The board of directors at its first meeting after each annual meeting of stockholders shall choose a chairman of the board, a president, one or more vice presidents, a secretary and a treasurer. No officer need be a member of the board of directors. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Section 3. Appointment of Additional Officers. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board of directors. Section 4. Compensation. The salaries and other compensation of all officers and agents of the corporation shall be fixed by the board of directors. Section 5. Term of Office, Removal and Vacancies. The officers of the corporation shall hold office until their successors are chosen and qualify or until their deaths, resignations or removal. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the members of the board of directors. Any vacancy occurring in any office of the corporation may be filled by the board of directors. Section 6. Resignations. Any officer may resign at any time by giving written notice to the board of directors, the chairman of the board, the vice chairman of the board, the president, or the secretary of the corporation. Such resignation shall take effect at the time specified in the written notice; and, unless the resignation is tendered only to take effect upon 11 acceptance thereof, the acceptance of such resignation shall not be necessary to make the resignation effective. Section 7. The Chairman of the Board. The Chairman of the board shall be the chief executive officer of the corporation and shall have the general direction of the affairs of the corporation, except as otherwise prescribed by the board of directors; shall preside at all meetings of the shareholders, of the board of directors and of the executive committee, if any, and shall designate the acting secretary for such meetings to take the minutes thereof for delivery to the secretary; may sign, with the secretary, assistant secretary, treasurer or assistant treasurer, certificates for shares of the corporation; may execute contracts in the name of the corporation; appoint and discharge agents and employees of the corporation, and shall be ex-officio a member of all committees. Section 8. The Vice Chairman of the Board. The vice chairman of the board shall be the chief operating officer of the corporation, and as such shall direct the operations of the corporation, subject to the control and direction of the board of directors and the chairman of the board. The vice chairman of the board shall assume such other duties as the board of directors or the chairman of the board may assign from time to time. The vice chairman of the board shall report to the chairman of the board. In the event that the chairman of the board is one of the following: absent or has allowed the office of chairman to be vacated, or is unable or refuses to act, the vice chairman of the board shall perform all duties and functions of the chairman of the board. He may sign, with the secretary or any other proper officer thereunto duly authorized certificates for shares of the corporation; may execute contracts in the name of the corporation; appoint and discharge agents and employees of the corporation; and shall be ex-officio a member of all committees. Section 9. President. The president shall be the general manager of the corporation, and as such shall look after and superintend all operations of the corporation, subject to the control and direction of the board of directors, the chairman of the board and the vice chairman of the board. The president shall assume such other duties as the chairman of the board, the vice chairman of the board or the board of directors may assign from time to time. The president shall report to the chairman of the board or the vice chairman of the board. In the event that each of the chairman of the board and the vice chairman of the board is one of the following: absent or has allowed his office to be vacated, or is unable or refuses to act, the president shall perform all duties and functions of the chairman of the board and the vice chairman of the board. He may sign, with the secretary or any other proper officer thereunto duly authorized certificates for shares of the corporation; may execute contracts in the name of the corporation; appoint and discharge agents and employees of the corporation, and in general shall perform all duties incident to the office of president. Section 10. The Vice Presidents. The vice presidents in the order of their seniority, unless otherwise determined by the board of directors, shall in the event that the president is absent, or has allowed the office of president to be vacated, or is unable or refuses to act, perform the duties of the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 11. The Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of 12 the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required; shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors; shall perform such other duties as may be prescribed by the board of directors, the chairman of the board or the president, under whose supervision the secretary shall be; and shall keep in safe custody the corporate seal of the corporation and when authorized by the board of directors, shall affix the same to any instrument requiring it and when so affixed, it shall be attested by the signature of the secretary or by the signature of any assistant secretary. Section 12. Assistant Secretaries. The assistant secretaries in the order of their seniority shall, in the event that the secretary is absent, or has allowed the office of secretary to be vacated, or is unable or unwilling to act, perform the duties and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 13. The Treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements. Section 14. Bond. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be renewed as required from time to time) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office and for the restoration to the corporation, in case of the death, resignation or removal from office of the treasurer, of all books, papers, vouchers, money and other property or whatever kind in the possession or under the control of the treasurer belonging to the corporation. Section 15. Assistant Treasurers. The assistant treasurers, in the order of their seniority, unless otherwise determined by the board of directors shall in the event the treasurer is absent, or has allowed the office of treasurer to be vacated, or is unable or refuses to act, perform the duties and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI Stock and Stockholders Section 1. Certificate of Stock. Every record holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of, the corporation by the chairman of the board, or the vice chairman of the board, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, registered in such stockholder's name, certifying the number of shares owned by such holder in the corporation. 13 Section 2. Classes and Series. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, assignations, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish, without charge to each stockholder who so requests, the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 3. Signatures. Where a certificate is countersigned (i) by a transfer agent other than the corporation or its employee, or (ii) by a registrar other than the corporation or its employee, any of or all the signatures on the certificate of the officers of the corporation may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be an officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 4. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuace thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity (or otherwise require the indemnification) against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 5. Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 6. Fixing Record Date. Except as otherwise provided in the Delaware GCL or the certificate of incorporation, the board of directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or other distribution or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or other distribtion or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such 14 notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or other distribution, or to receive such allotment of rights or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. Section 7. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments, a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII Indemnification The directors, officers, employees and agents of the corporation and certain of their respective heirs, successors and personal representatives shall be indemnified as provided in the certificate of incorporation. ARTICLE VIII General Provisions Section 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation and to Section 10 of Article III, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the corporation shall end on the Saturday closest to December 31st in each year. Section 4. Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 5. Certain Definitions. As used in these by-laws, the following terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended. 15 "Brennan" means Bernard F. Brennan. "Closing Date" means the date on which the closing pursuant to the Purchase Agreement (as herein defined) occurred. "Commission" means the Securities and Exchange Commission. "Common Stock," "Class A Common Stock, Series 1," "Class A Common Stock, Series 2," "Class A Common Stock, Series 3" and "Class B Common Stock" shall all have the meanings specified in the certificate of incorporation. "Delaware GCL" means the General Corporation Law of the State of Delaware, as the same shall be amended and in effect from time to time. "Designator" means the Management Shareholder who has the power to designate the Designated Management Optionees. As long as Brennan shall be a Management Shareholder and not have died or been adjudicated incompetent, or resigned as the Designator by written notice to the corporation, he shall be the Designator. If Brennan shall resign as the Designator, cease to be a Management Shareholder, die or be adjudicated incompetent, then in such event the Management Shareholder who from time to time thereafter is employed by a member of the Ward Group, is then the owner of the largest number of Shares, and is willing and able to serve as the Designator shall be the Designator; provided, however, that after the date which is the first anniversary of the date on which Brennan has resigned as the Designator, ceased to be a Management Shareholder, died or been adjudicated incompetent, the Designator shall consist of a committee comprised of both said Management Shareholder and the two (2) most senior officers (other than said Management Shareholder) from time to time of Ward who are also Management Shareholders and who are willing to serve as the Designator. Said committee shall act by the vote of a majority of its members. For the purposes of the foregoing provisions of this definition, a Management Shareholder shall be deemed to own all Shares owned by his Permitted Transferees. "Employee Stock Option Plan" means a stock option plan for the benefit of the employees of the Ward Group pursuant to which such employees may be granted options to purchase Shares of Common Stock. "Family" means a spouse or descendent or ancestor of a Management Shareholder, or a spouse of a descendent or ancestor of a Management Shareholder, or a trustee of a trust or a custodian of a custodianship primarily for the benefit of one or more of the foregoing and/or a Management Shareholder. "GE Capital" means General Electric Capital Corporation, a New York Corporation. "GE Capital Affiliate" means any entity which, at the time of the applicable determination, GE Capital controls, which controls GE Capital, or which is under common control with GE Capital, but does not include the Ward Group or any member thereof. For the purposes of the preceding sentence, "control" means the power, direct or indirect, to direct or cause the direction of the management and policies of a Person through voting securities, contract or otherwise. Without limiting the generality of the foregoing, as of the date on which the 16 Stockholders' Agreement was executed and delivered, Kidder, Peabody Group Inc. is a GE Capital Affiliate. "Management Shareholders" or "Management Shareholder" means a Type 1 Management Shareholder (as herein defined) or a Type 2 Management Shareholder, without distinction. "Person" means any individual, sole proprietorship, partnership, joint venture, unincorporated organization, association, corporation, trust, institution, public benefit corporation, entity or government. "Preferred Stock" and "Senior Preferred Stock" shall have the meanings specified in the certificate of incorporation. "Purchase Agreement" means that certain Stock Purchase Agreement dated as of March 6, 1988, as amended, among the corporation, Mobil Corporation and Marcor Inc. "Rule 144" means Rule 144, as amended, promulgated by the Commission under the Act. "Shareholder" means a Management Shareholder, a Permitted Transferee, GE Capital, and a GE Capital Affiliate who are the owners of Shares, and any Person owning Shares who is no longer a GE Capital Affiliate but who was a GE Capital Affiliate at the time such Person first acquired Shares. "Shares," except as otherwise specifically provided herein, means the shares of Common Stock of the corporation without distinction as to class or series, and shall include certificates of beneficial interest issued by the Voting Trustee (as herein defined), pursuant to the Voting Trust Agreement (as herein defined); provided, however, that (and without implication that a contrary result was intended, but by way of clarification): (i) for the purpose of determining the number of Shares eligible to vote or receive distributions, there shall be no duplication as between Shares held by the Voting Trustee, on the one hand, and certificates of beneficial interest by the Voting Trustee, on the other hand; and (ii) where the right to vote Shares or execute consents is granted or required pursuant to the provisions of this Agreement, except as expressly provided in Section 8.17 of the Stockholders' Agreement, the term "Shares" shall not include certificates of beneficial interest issued by the Voting Trustee under the Voting Trust Agreement; and these by-laws shall be interpreted in accordance with the foregoing proviso to the extent the context so requires. "Signature" means Signature Financial/Marketing, Inc., a Delaware corporation. "Stockholders' Agreement" means that certain Stockholders' Agreement dated as of June 17, 1988 among the corporation, Brennan, GE Capital and the other Persons who are parties thereto, including all amendments thereto as in effect from time to time. 17 "Terms and Conditions" mean those certain Montgomery Ward & Co., Incorporated Stock Ownership Plan Terms and Conditions agreed to by and between the corporation and participants in the Employee Stock Option Plan. "Transfer" means any transfer, sale, assignment, pledge, encumbrance or other disposition of Shares, or, in the case of the corporation, any issuance or sale of Shares, irrespective of whether any of the foregoing are effected voluntarily or involuntarily, by operation of law or otherwise, or whether inter vivos or upon death. "Transfer Notice" means a written notice of a proposed Transfer. "Type 1 Management Shareholder" means Brennan and any other Person who is designated by the Designator as a Type 1 Management Shareholder and who concurrently with the execution and delivery of the Stockholders' Agreement or at any time thereafter, in contemplation of that Person's acquisition of Shares, executes a counterpart of or joins in and agrees to be bound by, the Stockholders' Agreement as a Type 1 Management Shareholder. Other than Brennan and Myron Lieberman, as long as GE Capital and GE Capital Affiliate own, in the aggregate, at least twenty percent (20%) of the Shares which they acquired in June, 1988, no Person shall be designated as a Type 1 Management Shareholder without the prior consent of GE Capital, which consent shall not unreasonably be withheld. "Type 2 Management Shareholder" means any person who concurrently with the execution and delivery of the Stockholders' Agreement or at any time thereafter, in contemplation of that Person's acquisition of Shares, executes a counterpart of or at any time joins in and agrees to be bound by, the Stockholders' Agreement as a Type 2 Management Shareholder. Unless that Person has been designated by the Designator as, or is already, a Type 1 Management Shareholder, Type 2 Management Shareholders shall include all Persons who acquire Shares of Class A Common Stock pursuant to the exercise of options granted to them under the Employee Stock Option Plan, unless the Employee Stock Option Plan provides otherwise and/or such Persons are not required pursuant to the terms of the Employee Stock Option Plan to join in the Stockholders' Agreement. "Voting Trust Agreement" means that certain Voting Trust Agreement, dated as of June 21, 1988, among the corporation, Brennan and the other individuals who are parties thereto. "Voting Trustee" means the person serving as voting trustee under the Voting Trust Agreement. "Ward" means Montgomery Ward & Co., Incorporated, an Illinois corporation. "Ward Group" means the corporation and its direct and indirect subsidiaries. 18 ARTICLE IX Amendments The board of directors may, by vote of not less than two-thirds (2/3) of the members of the board of directors of the corporation, alter, amend or repeal these by-laws, or enact such other by-laws as in their judgment may be advisable for the regulation of the conduct of the affairs of the corporation; provided, however, that from and after the date on which the number of members of the board of directors which GE Capital has the right to designate pursuant to Section 1 of Article III of these by-laws has been reduced pursuant to the terms and conditions of said Section 1 of Article III, then Section 10 of Article III of these by-laws may be amended or terminated in whole or in part from time to time upon the affirmative vote or consent of both (x) a majority of the members of the board of directors, and (y) the holders of a majority of the then outstanding shares of Class A Common Stock. 19 EX-5 5 EXHIBIT 5 EXHIBIT 5 August 1, 1994 Montgomery Ward Holding Corp. One Montgomery Ward Plaza Chicago, IL 60671-0042 Re: Montgomery Ward Holding Corp. Post-Effective Amendment No. 6 to Registration Statement on Form S-l Registration No. 33-33252 (the "Registration Statement") Gentlemen: We have served as counsel to Montgomery Ward Holding Corp., a Delaware corporation (the "Company"), in connection with the above-referenced Registration Statement. We have examined the Certificate of Incorporation of the Company, its By-laws, minutes of meetings of stockholders and directors and such other records and documents as we consider necessary for the purpose of rendering this opinion. In our opinion: 1. The Company is organized and existing under the business corporation laws of the State of Delaware. 2. The Company has an authorized capital of 25,000,000 shares of Class A Common Stock, Series 1, $.01 par value, of which 25,000,000 shares are issued and shares are outstanding; 5,412,000 shares of Class A Common Stock, Series 2, $.01 par value, of which shares are issued and shares are outstanding; 400,000 shares of Class A Common Stock, Series 3, $0.01 par value, of which no shares are issued or outstanding; and 25,000,000 shares of Class B Common Stock, $.01 par value, of which 25,000,000 shares are issued and outstanding. 3. The 3,000,000 shares of Class A Common Stock, Series 1 covered by the Registration Statement and the Voting Trust Certificates issued in exchange therefor are validly issued, fully paid, and non-assessable. 4. Based on the facts set forth in the Registration Statement, it is our opinion that the material federal income tax consequences to the Company and purchasers of Shares are set forth in the discussion under the caption "CERTAIN FEDERAL INCOME TAX ASPECTS" on pages 25-26 of the Prospectus. We hereby confirm as our opinion the entirety of said discussion. This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Any variation or differences in the facts as incorporated herein might affect the conclusions herein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the captions "CERTAIN FEDERAL INCOME TAX ASPECTS" and "LEGAL OPINIONS" in the Prospectus that is a part of the Registration Statement. Very truly yours, ALTHEIMER & GRAY EX-10.(II)(B)(11) 6 EX-10.(II)(B)(11) EXHIBIT 10.(ii)(B)(11) TENTH AMENDMENT TO ACCOUNT PURCHASE AGREEMENT AMENDMENT, made and entered into as of June 16, 1994, by and between MONTGOMERY WARD & CO., INCORPORATED ("Seller"), an Illinois corporation with its chief executive offices located at 619 West Chicago Avenue, Chicago, Illinois 60671, and MONTGOMERY WARD CREDIT CORPORATION ("MWCC"), a Delaware corporation with its chief executive offices located at 3720 Howard Hughes Parkway, Las Vegas, Nevada 89109. W I T N E S S E T H: -------------------- WHEREAS, Seller and MWCC are parties to an Account Purchase Agreement dated as of June 24, 1988, as amended by a letter agreement dated April 21, 1989 (the "First Amendment"), an agreement dated December 26, 1989 (the "Second Amendment"), a letter agreement dated April 24, 1990 (the "Third Amendment"), a letter agreement dated as of December 26, 1990 (the "Fourth Amendment"), and agreement dated May 23, 1992 (the "Fifth Amendment"), a letter agreement dated December 29, 1992 (the "Sixth Amendment"), a letter agreement dated April 29, 1993 (the "Seventh Amendment"), a letter agreement dated September 15, 1993 (the "Eighth Amendment"), and an amendment dated February 16, 1994 (the "Ninth Amendment") (collectively, the "Agreement"), pursuant to which MWCC agreed to purchase and has purchased Accounts and Indebtedness from Seller upon the terms and subject to the conditions of the Agreement; and WHEREAS, Seller and MWCC have agreed that, in the State of Washington, MWCC shall no longer purchase Accounts and Indebtedness arising from Credit Agreements, but MWCC shall establish Accounts for such Account Debtors through a Lender Credit Card Agreement (as hereinafter defined) and add Indebtedness in connection therewith; and WHEREAS, it is the mutual desire of Seller and MWCC that the Agreement be amended in accordance with the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions hereinafter set forth, the parties hereto hereby agree as follows: 1. Capitalized terms used herein which are not otherwise defined shall have the same meaning as in the Agreement. 2. The definition of "Account" in Section 1 is deleted and substituted in its place is the following: "Account" shall mean any account, account receivable, other receivable, contract right, chose in action, general intangible, chattel paper, instrument, document, note, or obligation and proceeds thereof, whether now owned or hereafter acquired, and wherever located, arising out of the sale of Merchandise by Seller, its Affiliates or any Licensees to any Account Debtor pursuant to either a Credit Agreement or a Lender Credit Card Agreement. The term Account shall also include (a) all of the Account Documentation evidencing the same, the receivables therefrom (including all Indebtedness), and the proceeds thereof, (b) all rights of Seller in any Merchandise which is security or collateral for Accounts, and (c) all guarantees, claims, security interests, or other security held by or granted to Seller to secure payment by any Person with respect thereto. Notwithstanding the foregoing, "Accounts" shall not include (a) those generated pursuant to layaway plans, and (b) those excluded pursuant to Section 5.15. Reference in this Agreement to Accounts owned by MWCC shall (a) also include all Accounts then owned or held by any direct or indirect assignee or secured party of, or purchaser from, MWCC (other than Seller) (collectively, "Assignees") and (b) to the extent any Indebtedness relating to such Account is not owned by MWCC (including Assignees), be deemed to be a reference to the Account only to the extent of the Indebtedness owned by MWCC (including Assignees). 3. The definition of "Account Documentation" in Section 1 is deleted and substituted in its place is the following: "Account Documentation" shall mean any and all documentation relating to an Account, including, without limitation, applications for Accounts, Credit Agreements, Lender Credit Card Agreements, sales slips, delivery receipts, billing statements, checks and stubs, correspondence, memoranda, magnetic tapes, disks, or hardcopy formats, or any other computer-readable data transmissions or software related thereto, and any other written material related thereto, or any microfilm copy of any of the foregoing. 4. The definition of "Average Billed Indebtedness" in Section 1 is deleted and substituted in its place is the following: 2 "Average Billed Indebtedness" shall mean the sum of the gross accounts receivable of MWCC, Assignees, and the holder of the Indebtedness subject to the Morgan Agreement, resulting from the purchase, establishment and/or addition of Accounts, as computed pursuant to MWCC's Accounting Practices, but without the deduction of an allowance for bad debts, billed on each of the Billing Cycle closing dates during the Fiscal Year in question, divided by twelve (12). Notwithstanding the foregoing, if the Fiscal Year in question is a partial Fiscal Year, "Average Billed Indebtedness" shall mean the sum of the gross accounts receivable of MWCC, Assignees, and the holder of the Indebtedness subject to the Morgan Agreement, resulting from the purchase, establishment and/or addition of Accounts, as computed pursuant to MWCC's Accounting Practices, but without deduction of an allowance for bad debts, billed on each of the Billing Cycle closing dates during the complete MWCC fiscal months within such partial Fiscal Year, divided by such number of such complete MWCC fiscal months. In the event that the number of times an Account is billed during a Fiscal Year is other than twelve (12), the parties hereto shall agree to an appropriate adjustment to the calculations set forth herein. 5. The definition of "Ineligible Indebtedness" in Section 1 is deleted and substituted in its place is the following: "Ineligible Indebtedness" shall mean Indebtedness which Seller is required to purchase from MWCC pursuant to Section 3.4. 6. The following definitions shall be added after the definition of "Layer Blended Rate" in Section 1: "Lender Credit Card" shall mean a card or similar device issued to an Account Debtor residing in the State of Washington under a Lender Credit Card Agreement which gives the Account Debtor the privilege of obtaining credit from MWCC or a subsequent assignee of the Lender Credit Card Agreement from time to time through the Account Debtor's incurring of Indebtedness as reflected in a sales slip or memorandum (including an electronically generated or transmitted entry) evidencing the purchase of Merchandise to be paid in accordance with that agreement. "Lender Credit Card Agreement" shall mean an agreement between an Account Debtor and MWCC or a subsequent assignee of the agreement pursuant to which the Account Debtor receives a Lender Credit Card from MWCC. 3 7. The definition of "Licensee" in Section 1 is deleted and substituted in its place is the following: "Licensee" shall mean any Person who, now or hereafter, pursuant to any now existing or future agreement with Seller or an Affiliate of Seller, is permitted from time to time by Seller or such Affiliate to make credit sales of Merchandise to Account Debtors pursuant to Credit Agreements or Lender Credit Card Agreements, as appropriate, which would include, but not be limited to, acceptance of Montgomery Ward credit cards by any Persons that lease or license space in any stores or facilities owned, leased or operated by Seller or an Affiliate of Seller. 8. The definition of "Maximum Repurchase Amount" is deleted and substituted in its place is the following: "Maximum Purchase Amount" shall have the meaning assigned to it in Section 3.4 hereof. 9. The definition of "Merchandise" is deleted and substituted in its place is the following: "Merchandise" shall mean goods and services, including without limitation accessories, installation, delivery services, automotive services, repair services, service contracts, insurance and club fees, for personal, family, or household use. Merchandise shall include items that are new or used at the time of sale, including clearance items and items that are returned and restored to the inventory and subsequently offered for resale. 10. The definition of "Purchase Price" is deleted. 11. The section heading for Section 3 and Section 3.1 are deleted and substituted in their place is the following: 3. ORIGINATION OF ACCOUNTS ----------------------- 3.1. Origination of Accounts and Indebtedness Following the Stated Time. (1) Other than with respect to persons residing in the State of Washington and purchasing Merchandise, from and after the date of this Amendment, subject to the provisions hereof (including but not limited to Section 5 hereof), Seller shall offer to sell, assign, and transfer to MWCC, free and clear of all Liens (except in the circumstances referred to in Section 4 6.3(4)), all Accounts and Indebtedness originated from time to time after the Stated Time, and MWCC shall purchase and acquire all such Accounts and Indebtedness so offered (subject to the approval by MWCC of the credit limits for each Account and acceptance of new Account Debtors pursuant to Section 5.1 hereof, in accordance with the credit policies as provided in Section 5.9). (2) With respect to persons residing in the State of Washington and purchasing Merchandise, from and after the date of this Amendment, subject to the provisions hereof (including but not limited to Section 5 hereof), Seller agrees that MWCC shall have the exclusive right to establish a credit facility using the tradenames, service marks and/or trademarks under which Seller conducts business, which use shall be governed by the terms of the License Agreement by and between the parties hereto dated June 24, 1988 and amended May , 1994, and MWCC agrees that it shall provide Lender Credit Card Agreements and add Indebtedness thereunder (subject to the approval by MWCC of the credit limits for each Account and acceptance of new Account Debtors pursuant to Section 5.1 hereof, in accordance with the credit policies as provided in Section 5.9). The terms of a Lender Credit Card Agreement shall be substantially identical to the terms of the Credit Agreements currently used in the State of Washington, except that (a) the initial parties to a Lender Credit Card Agreement shall be MWCC and an Account Debtor and (b) MWCC shall not take a security interest in Merchandise sold under Lender Credit Card Agreements. (3) Notwithstanding anything otherwise provided herein, MWCC may, but shall not be obligated to, purchase any such Accounts and Indebtedness under Credit Agreements or establish or add Accounts and Indebtedness under Lender Credit Card Agreements at any time during which the Net Receivable Balance owned by MWCC (but excluding for this purpose the portion of the Net Receivable Balance owned by any other Person, including Assignees, who have purchased such portion of the Net Receivable Balance from MWCC on what is effectively a non-recourse basis (such non-recourse determination to be made by MWCC in its reasonable judgment)) equals or exceeds the Maximum Investment. (4) MWCC agrees (a) annually at any time during each Fiscal Year, and (b) at such other time as there may be proposed a change in credit terms, policies or procedures pursuant to this Agreement that could increase the amount of Indebtedness incurred by Account Debtors, to review any request by Seller to increase the Maximum Investment for the ensuing two (2) year period. In making such request, Seller may furnish to MWCC the then current five-year plan of Seller, which plan shall be based on reasonable estimates and projections. MWCC and GE 5 Capital shall act reasonably within the context of this Agreement in responding to any request by Seller to increase the amount of the Maximum Investment. (5) Except as otherwise provided in Sections 3.4 and 4, all Accounts and/or Indebtedness sold to, or established and added by, MWCC pursuant to this Section 3.1 shall be sold to, or established and added by, MWCC on a non-recourse basis and without a guaranty of collection. 12. The section heading of Section 3.2 and Section 3.2(1) are deleted and substituted in their place is the following: 3.2. Payment for Indebtedness. (1) MWCC shall pay Seller the face value of the Indebtedness for all Indebtedness purchased, established or added to an Account pursuant to Section 3.1 hereof. A computer-readable medium, or information in such form as is mutually approved by the parties hereto, concerning such Indebtedness, shall be transmitted to MWCC at the office or offices MWCC designates, as such offices may from time to time be changed upon not less than fifteen (15) Business Days advance notice to Seller, provided such new offices contain the necessary computer and telecommunications capabilities. MWCC shall pay Seller the amount of such Indebtedness on or before 2:00 PM Eastern Time of each Business Day during the term of this Agreement for which said information has been received at such office or offices by MWCC on or before 11:00 AM Eastern Time on the prior Business Day. MWCC shall tender such payments to Seller by wire transfer of immediately available same day federal funds into one bank account from time to time designated by Seller, as such bank account may from time to time be changed upon not less than fifteen (15) Business Days advance notice to MWCC. For example, if such information on Indebtedness which arose on Friday, Saturday and Sunday is provided to MWCC by 11:00 AM Eastern Time on the following Monday (assuming that Monday is a Business Day), a payment for those three (3) days shall be wired to Seller on or before 2:00 PM Eastern Time on that Tuesday (assuming that Tuesday is a Business Day). If, after taking reasonable precautions, as a result of a circumstance beyond the reasonable control (e.g., computer or telecommunications breakdown) of Seller, such information with respect to any day has not been received by 11:00 AM Eastern Time on a Business Day, and provided Seller thereafter takes all reasonable steps to deliver such information to MWCC by alternate means, MWCC shall pay Seller on or before 2:00 P.M. Easterm Time the next Business Day thereafter an estimated amount equal to the amount payable for the same day during the preceding calendar week for which information was provided (after taking into account appropriate differences in 6 such days, such as one being a holiday), and such estimated payment shall be adjusted on the first Business Day after the actual information is available by 11:00 AM Eastern Time on such Business Day by a payment on or before 2:00 PM Eastern Time on the following Business Day by wire transfer of immediately available same day federal funds from Seller to MWCC, or MWCC to Seller, as the case may be. Any such adjusting payment made by Seller to MWCC shall include interest on the adjustment amount at the Prime Rate from the time the estimated payment was made until the adjusting payment is made. In the event an estimated payment is made, Seller shall provide such information as soon as possible and shall pay MWCC within thirty (30) days after billing for any lost finance or other charges on Accounts accruing until such information is provided, but only to the extent such finance or other charges were lost due to the failure to provide such information. For example, if on a Monday (assuming that Monday is a Business Day) the information is not transmitted by 11:00 AM Eastern Time for the immediately preceding Friday, Saturday and Sunday, an estimated payment in the circumstances described above shall be made on or before 2:00 PM Eastern Time on that Tuesday (assuming that Tuesday is a Business Day) equal to the amount that was payable for the immediately preceding Friday, Saturday and Sunday for which the information was provided (after taking into account appropriate differences in such days, such as one being a holiday). Assuming the actual information for such Friday, Saturday and Sunday is first available by 11:00 AM Eastern Time the following Thursday (assuming that Thursday is a Business Day and Seller shall have made the information available as soon as possible), the adjusting payment, together with interest thereon at the Prime Rate if provided for above, shall be made on or before 2:00 PM Eastern Time on the following Friday (assuming the following Friday is a Business Day). 13. The Section 3.3(2)(ii) is deleted and substituted in its place is the following: (ii) "Net Receivable Balance" means for the day in question the amount by which (A) the gross accounts receivable of MWCC and its Assignees (including the portion thereof comprised of finance and other credit charges), as of the close of business of such day, resulting from its purchase, establishment or addition of Accounts, as computed pursuant to MWCC's Accounting Practices exceeds (B) the amount of MWCC's allowance for bad debts with respect to such accounts receivable, as of the close of business on such day, also as computed pursuant to MWCC's Accounting Practices. 7 14. The first full paragraph of Section 3.4 is deleted and substituted in its place is the following: 3.4 Ineligible Indebtedness. When any New Indebtedness purchased, established or added pursuant to this Agreement (including without limitation New Indebtedness pursuant to Old Accounts and New Indebtedness that is Defaulted Indebtedness which has been theretofore included in the calculations pursuant to Section 4) then owned by MWCC becomes Ineligible Indebtedness, MWCC shall have the right, subject to the terms hereof, during the term and after the expiration of this Agreement as provided in Section 15.2 to require Seller to purchase from MWCC such Ineligible Indebtedness for the face value thereof, excluding any finance or, if agreed to by the parties hereto, other credit charges. Until such time as MWCC, in its sole discretion, exercises its right to require Seller to purchase Ineligible Indebtedness, MWCC shall use its best efforts to collect such Ineligible Indebtedness from the relevant Account Debtor to the extent such Indebtedness is the valid obligation of the Account Debtor. The purchase price for such Ineligible Indebtedness shall be paid directly by Seller to MWCC or offset by MWCC against amounts then owed to Seller thirty (30) days after notice from MWCC of the amount claimed to be due, except to the extent the claimed amounts are disputed by Seller. Upon any such purchase, MWCC hereby assigns Seller all of its right, title, and interest in and to such Indebtedness, free and clear of any and all Liens created by MWCC or Assignees, but without any other warranty, and the ownership interest of MWCC in such Indebtedness shall be terminated. After Seller has purchased such Ineligible Indebtedness (a) MWCC's obligation to service such Ineligible Indebtedness, as set forth in Section 5.1 hereof, shall be terminated, (b) all payments in respect of such Ineligible Indebtedness shall be promptly forwarded by MWCC to Seller, and (c) upon Seller's request, MWCC shall deliver to Seller all available Account Documentation received by MWCC with respect to such Ineligible Indebtedness, provided if Seller is unable to enforce or collect any Ineligible Indebtedness due to MWCC's failure to deliver such Account Documentation that it previously received, MWCC shall repurchase such Ineligible Indebtedness from Seller. Anything contained herein to the contrary notwithstanding, the aggregate amount of Ineligible Indebtedness, which excludes any finance or other credit charges to the extent provided above, which Seller shall be required to purchase during each of the first full twenty-four (24) Settlement Periods which occur during the term of this Agreement shall not exceed six hundredths percent (.06%) of the Credit Sales for the Settlement Period immediately preceding the one in question, prorated for the first Settlement Period ("Maximum Purchase Amount"). At such time during any Settlement Period as Seller has purchased such Ineligible Indebtedness in an amount 8 equal to the Maximum Purchase Amount for such Settlement Period, it shall not be required to purchase any additional Ineligible Indebtedness until the next Settlement Period. In calculating Ineligible Indebtedness that is subject to the Maximum Purchase Amount limitation, there shall be excluded merchandise adjustments as provided in (4) below and unauthorized charges as provided in (2) below to the extent the unauthorized charges under (2) below were caused by fraudulent acts of employees of Seller, its Affiliates or the Licensees. 15. Section 3.4(1) is deleted and substituted in its place is the following: (1) Unidentifiable Media. Unidentifiable media are media that does not have a valid account number, or media with an account number that is illegibly imprinted or written in. MWCC shall directly request the media from the issuing location. The issuing location is responsible for providing a legible copy of the media with correct account number to MWCC within ten (10) days of notice to the issuing location. MWCC has the right to chargeback if (a) Seller has not responded to the request for media before expiration of the ten (10) day period, and (b) MWCC after reasonable efforts is unable to identify the Indebtedness represented by the media with a valid account number. Notwithstanding the foregoing, all chargebacks by MWCC for unidentifiable media must occur within sixty (60) days of the date of the sale of Accounts and Indebtedness to, or the establishment or addition of Accounts and Indebtedness by, MWCC. Seller has sixty (60) days after the date of the chargeback to complete additional research and, if successful, reverse the chargeback whereupon such Ineligible Indebtedness shall become Indebtedness to be purchased by MWCC. 16. Section 3.4(5) is deleted and substituted in its place is the following: (5) Missing Media. Requests received by MWCC from customers for supporting sales media shall be promptly communicated by MWCC directly to the issuing location. Seller is responsible for providing MWCC with the requested media within ten (10) days of receipt of the request. Indebtedness represented by media not provided within such ten (10) day period may be charged back by MWCC to Seller. Seller has thirty (30) days after the chargeback to locate the media and reverse the chargeback whereupon such Ineligible Indebtedness shall become Indebtedness to be purchased by MWCC. Notwithstanding the foregoing, in no event may MWCC chargeback to Seller any items described in this subsection later than thirty (30) days after the receipt of the request for adjustment from the customer. 9 17. In Section 4.1(1), the subparagraph beginning "Net Defaulted Indebtedness" is deleted and substituted in its place is the following: "Net Defaulted Indebtedness" shall mean the amount of Defaulted Indebtedness first becoming Defaulted Indebtedness during the Fiscal Year in question less the gross amount (without deduction for attorneys' fees or other collection costs) of cash recoveries ("Gross Recoveries") received during the Fiscal Year in question in respect of (a) Defaulted Indebtedness (regardless of when such Defaulted Indebtedness occurred), or (b) Indebtedness written off prior to the Stated Time. It is understood that Gross Recoveries would include payments made to MWCC by Seller on Defaulted Indebtedness pursuant to Section 5.3(5), proceeds of credit insurance, and payments made to MWCC in respect of the purchase of Ineligible Indebtedness which was, prior to the purchase, Defaulted Indebtedness previously included in the calculations pursuant to Section 4. 18. Section 4.2 is deleted and substituted in its place is the following: 4.2 Average Indebtedness. "Average Indebtedness" shall mean the sum of the gross accounts receivable of MWCC, Assignees, and the holder of the Indebtedness subject to the Morgan Agreement, resulting from the purchase, establishment or addition of Accounts, as computed pursuant to MWCC's Accounting Practices, but without deduction of an allowance for bad debts, on the last day of each of the twelve (12) Settlement Periods which occur during the Fiscal Year in question, divided by twelve (12). If the Fiscal Year in question is a partial Fiscal Year, the calculation of Average Indebtedness shall be computed based on the number of Settlement Periods within the Fiscal Year. 19. The introduction to Section 5.1(1) is deleted and substituted in its place is the following: (1) In connection with its purchase, establishment or addition of Accounts and Indebtedness and its servicing thereof, MWCC shall: 20. Section 5.1(3) is deleted and substituted in its place is the following: (3) MWCC shall provide all necessary and proper (a) promotional materials and signs in a format acceptable to 10 Seller, or reimburse Seller for such promotional materials and signs that Seller provides, (b) credit application forms, (c) Credit Agreements and Lender Credit Card Agreements (for use in the State of Washington), and (d) legally required credit disclosure forms and customer payment receipt forms that are compatible with Seller's point-of-sale registers, or reimburse Seller for such customer payment receipt forms as Seller provides. Notwithstanding the foregoing, Seller shall bear the expense for the foregoing items in this subsection (3) that are used in and/or distributed from its retail stores, unless MWCC changes the form thereof, in which case MWCC shall at its expense replace those then held in the retail stores. 21. Section 5.13 is deleted and substituted in its place is the following: 5.13. Limitation on MWCC. MWCC shall not, and shall not permit any other Person (including pursuant to Section 5.12) to, directly or indirectly utilize for any purpose other than the servicing of Accounts and Account Debtors (a) personnel that handle incoming Account Debtor inquiries (other than mail inquiries) directly with Account Debtors (unless MWCC maintains other means for achieving Transparent Servicing), or (b) the Credit Agreements, Lender Credit Card Agreements, Accounts and credit cards that may be issued pursuant thereto, provided, however, that MWCC may use such Accounts for financing purposes, including, without limitation, securitizing the sale of Indebtedness or selling participations in Indebtedness. It is understood that the credit cards to be issued in connection with the Accounts, Credit Agreements and Lender Credit Card Agreements may not be directly or indirectly utilized to extend credit, make sales of products or services, or for any other purpose by anyone other than Seller, its Affiliates and the Licensees. 22. The section heading and introductory sentence of Section 6.3 and 6.3(1) are deleted and substituted with the following: 6.3. Conditions to Each Purchase, Establishment or Addition of Accounts and Indebtedness by MWCC. It shall be a condition precedent to the obligation of MWCC to purchase, establish or add Accounts and Indebtedness from Seller, its Affiliates and the Licensees (which condition may be waived by MWCC, but any such waiver shall not apply to future purchases, establishments or additions as to which there is no waiver) that the following statements shall be true and correct as of the date of each subsequent purchase, establishment or addition of Accounts and Indebtedness: 11 (1) All of the representations and warranties of Seller contained in Section 8 of this Agreement which (a) if not true and correct would constitute a Seller Default pursuant to Section 16.1 and (b) are Remade Seller Representations and Warranties as provided in Section 8, shall be correct in all material respects on and as of the date of such purchase, establishment or addition as though made on and as of such date. 23. Section 6.3(2) is deleted and substituted with the following: (2) No event shall have occurred and be continuing, or would result from such purchase, establishment or addition, which constitutes a Seller Default. 24. Section 6.3(4)(a) is deleted and substituted with the following: (4)(a) Except as provided in subsection (b) below, no outstanding Lien in excess of Ten Million Dollars ($10,000,000) shall have been placed against the Accounts or Indebtedness owned or being tendered for purchase, establishment or addition by MWCC, taken as a whole (other than Liens created or caused by MWCC or Assignees) unless Seller (i) promptly commences and diligently proceeds to attempt to have such Lien removed, and (ii) provides, or causes to be provided, security reasonably acceptable to MWCC, and (b) no outstanding Lien created by an officer of Seller shall have been placed against the Accounts or Indebtedness owned or being tendered for purchase, establishment or addition by MWCC, taken as a whole. 25. Section 6.3(5) and the concluding paragraph of Section 6.3 are deleted and substituted with the following: (5) No event shall have occurred and be continuing which is described in Section 16.1(5) or 16.1(6) hereof which, with the passage of time, shall constitute a Seller Default, except that, during such sixty (60) day period referred to in Section 16.1(5) or 16.1(6), upon request of Seller MWCC shall purchase Accounts and Indebtedness at ninety percent (90%) of the face value of the Indebtedness to be purchased, and establish or add Accounts and Indebtedness and pay to Seller ninety percent (90%) of the face value of the Indebtedness to be added and MWCC shall credit to a reserve account ("Liquidation Account") ten percent (10%) of such face value, provided that MWCC shall not be obligated to purchase, establish or add, during such period after the earliest to occur of (a) fifteen (15) days after the event described in Section 16.1(5) or 16.1(6) shall 12 first occur, (b) a trustee shall be appointed in any proceeding described therein, or (c) an order for relief shall be entered in such proceeding, unless an order in such form as shall be reasonably acceptable to MWCC approving such purchase, establishment or addition pursuant to the terms of this Agreement (including the Liquidation Account) shall have been entered for the benefit of MWCC by a court having jurisdiction of the matters. Seller shall have no right, title or interest in or to the Liquidation Account, except that such balance of the Liquidation Account shall be paid to Seller upon the earlier of the time(s) when (a) an event under Section 16.1(5) or 16.1(6) is no longer continuing, or (b) all of Seller's Obligations hereunder have been paid or otherwise satisfied in full, including, without limitation, the payment for Defaulted Indebtedness pursuant to Section 4.1, which obligation pursuant to Section 4.1 shall survive any termination of this Agreement due to a Seller Default under Section 16.1(5) or 16.1(6) until all Accounts are either collected or written off by MWCC. Such Liquidation Account shall bear interest at the Commercial Paper Rate, calculated on a simple basis, in effect from time to time during the Settlement Periods during which there is a balance outstanding in the Liquidation Account, and such interest shall be added to the balance of the Liquidation Account. To the extent, if any, that Seller has an interest in such Liquidation Account, Seller hereby grants a security interest to MWCC in such Liquidation Account. The acceptance by Seller of the proceeds of each purchase, establishment or addition of Indebtedness shall be deemed to constitute representations and warranties by Seller that the conditions in this Section 6.3 have been satisfied. 26. Section 6.4 is deleted and substituted with the following: 6.4 Conditions to Each Sale or Addition of Indebtedness. It shall be a condition precedent to the obligation of Seller to sell Accounts and Indebtedness to MWCC or tender Accounts and Indebtedness to MWCC for purchase, establishment or addition (which condition may be waived by Seller, but any such waiver shall not apply to future sales or tenders as to which there is no waiver) that the following statements shall be true and correct as of the date of each sale of Accounts and Indebtedness: (1) All of the representations and warranties of MWCC contained in Section 9 of this Agreement which (a) if not true and correct would constitute a MWCC Default pursuant to Section 16.2, and (b) are Remade MWCC Representations and Warranties as provided in Section 9 shall be correct in all 13 material respects on and as of the date of each such sale or tender as though made on and as of such date. (2) No event shall have occurred and be continuing, or would result from such sale or tender, which constitutes a MWCC Default. 27. Section 7.1 is deleted and substituted with the following: 7.1. Security Interest. The parties hereto intend that the transactions contemplated by Section 3.1(1) shall be treated as a purchase and sale of Accounts and Indebtedness for all purposes and that the transactions contemplated by Section 3.1(2) hereof shall be treated as an extension of credit under Lender Credit Card Agreements to Account Debtors who wish to obtain financing to purchase Merchandise. The parties do not intend that the transactions contemplated by Section 3.1 of this Agreement be deemed a loan from MWCC to Seller. In recognition of the applicability of Article 9 of the Code to some of the contemplated transactions, and without conceding any such applicability to all of the property and interests specified herein, and as additional security for the payment of and performance by Seller of any and all obligations whatsoever to MWCC, Seller, to the extent of its interest, hereby grants to MWCC continuing first priority Liens in and to all Accounts and Indebtedness either purchased from Seller and then owned by MWCC or established and added by MWCC (all subject to the Morgan Lien, if any), which Liens are granted to secure the Obligations, together with an assignment to MWCC (subject to the Morgan Lien, if any) of Liens, if any, in and to all Merchandise purchased by Account Debtors pursuant to Accounts then owned by MWCC, to the extent of the Liens of Seller thereon; provided, however, that such Liens shall not include Liens, if any, on Merchandise purchased pursuant to Accounts after such Merchandise has been returned to Seller until such time as such Merchandise may again be sold pursuant to an Account creating Indebtedness then owned by MWCC. In addition, Seller grants to MWCC a continuing first priority Lien in and to the Liquidation Account, to the extent Seller has an interest in such Liquidation Account, as provided in Section 6.3(5). 28. Section 7.4 is deleted and substituted with the following: 7.4. Further Assurances. In addition to the undertakings specifically provided for in this Agreement, Seller and MWCC shall each do all other things and sign and deliver all other documents and instruments reasonably requested by the other 14 to perfect, protect, maintain and help enforce the Liens of MWCC and the priority of such Liens, and all other rights granted pursuant to this Agreement. Such acts shall include, without limitation, indicating on the books and records of Seller that Accounts and Indebtedness have been sold and assigned to, or established and/or added by MWCC (to the extent so sold or established and/or added) and are subject to a Lien pursuant to this Agreement; the filing of financing statements, amendments, and termination statements under the Code relating to the Accounts and Indebtedness then owned by MWCC; and the delivery of any Account Documentation (including, without limitation, computer tapes) the physical possession of which MWCC requires in connection with the ownership, collection and enforcement of Accounts and Indebtedness owned by it. If Seller fails to do so within ten (10) Business Days after request, Seller irrevocably authorizes MWCC to execute alone any financing statement or any other document or instrument which may be required to perfect or protect any Lien granted to MWCC pursuant to this Agreement, and authorizes MWCC to sign Seller's name on the same. 29. Section 7.6 is deleted and substituted with the following: 7.6. Continued Liability. Anything herein to the contrary notwithstanding, (a) Seller, its Affiliate and the Licensees shall remain liable under any contracts and agreements with any Account Debtor that relate to the Merchandise sold (as opposed to the Credit Agreement or Lender Credit Card Agreement, Account, or Indebtedness), and to the extent set forth therein to perform all of their duties and obligations pursuant thereto to the same extent as if this Agreement had not been executed; (b) the exercise by MWCC of any rights pursuant to this Agreement shall not release Seller, its Affiliates or the Licensees from any of such duties or obligations under the contracts and agreements; and (c) except to the extent specifically set forth herein, MWCC shall not have any obligation or liability with respect to any Merchandise by reason of this Agreement or be obligated to perform any of the obligations or duties of Seller pursuant to this Agreement. 30. The introductory paragraph of Section 8 is deleted and substituted in its place is the following: Seller makes the following representations and warranties to MWCC as set forth below in this Section 8 as of the date hereof. Each and all of such representations and warranties shall survive the execution and delivery of this Agreement except for those set forth in Sections 8.5 and 8.10 which shall only survive to the extent MWCC gives Seller written notice of any misrepresentation or breach of warranty (specifying in reasonable 15 detail the basis thereof) on or before fifteen (15) months after the date hereof. Each and all of such representations and warranties which are set forth in Sections 8.1(a), 8.1(b), 8.1(c), 8.1(d), 8.2(b), 8.2(c), 8.2(d), 8.4, 8.6, 8.7, and 8.9 shall be deemed to be restated and remade ("Remade Seller Representations and Warranties") on each date on which MWCC purchases, establishes or adds Accounts and Indebtedness. Notwithstanding anything to the contrary contained in this Agreement, except for the representations and warranties set forth in Section 8.9, in no event shall Seller be liable (by way of indemnification or otherwise) for any misrepresentation or breach of warranty, to be read without limitation as to materiality for the purposes of this sentence, until the aggregate amount recoverable under this Agreement on account thereof exceeds Two Million Dollars ($2,000,000), and then only to the extent of the excess of such aggregate amount recoverable over Two Million Dollars ($2,000,000). 31. Section 8.9 is deleted and substituted with the following: 8.9. Accounts. Each item of Indebtedness on an Account owned by MWCC (and, to the extent applicable, each Account pursuant to which such Indebtedness is incurred) at the time of a purchase, establishment or addition: (a) is free and clear of any and all Liens, other than Liens resulting from an act or omission of MWCC or Assignees, in favor of any Person other than MWCC and the Morgan Lien (if any); (b) arises in connection with a bona fide sale and delivery of Merchandise by Seller, its Affiliates, or the Licensees, or the predecessors of any of the foregoing, to an Account Debtor; and (c) is for a liquidated amount as stated in the Account Documentation relating thereto, subject to returns, allowances and other adjustments in the ordinary course of business. 32. The following is added as Section 8.11: 8.11. Accounts. Treatment of Washington Residents. On and after the date of this Amendment, Seller shall utilize Lender Credit Card Agreements in connection with the establishment of Accounts for residents of the State of Washington who purchase Merchandise and shall not knowingly utilize Credit Agreements for residents of the State of Washington who purchase Merchandise. 33. The first paragraph of Section 9 is deleted and substituted with the following: 16 MWCC makes the following representations and warranties to Seller as set forth below in this Section 9 as of the date hereof. Each and all of such representations and warranties shall survive the execution and delivery of this Agreement. Each and all of such representations and warranties which are set forth in Sections 9.1(a), 9.1(b), 9.1 (last sentence) and 9.3 shall be deemed to be restated and remade ("Remade MWCC Representations and Warranties"), on each date on which MWCC purchases, establishes or adds Accounts and Indebtedness. Notwithstanding anything to the contrary contained in this Agreement, in no event shall MWCC be liable (by way of indemnification or otherwise) for any misrepresentations or breach of warranty, to be read without limitations as to materiality for purposes of this sentence, until the aggregate amount recoverable under this Agreement on account thereof exceeds Two Million Dollars ($2,000,000), and then only to the extent of the excess of such aggregate amount recoverable over Two Million Dollars ($2,000,000). 34. Section 12.1 is deleted and substituted with the following: 12.1. MWCC's Instructions. Seller shall use only forms and contracts evidencing the Credit Agreement, the Lender Credit Card Agreement and comprising Account Documentation, in connection with Accounts owned by MWCC, approved by MWCC to the extent of, and in connection with, the legal content thereof, e.g., in connection with compliance with truth-in-lending laws and regulations. 35. Section 12.3 is deleted and substituted with the following: 12.3. Seller's Licensees. Seller shall, upon the request of MWCC, forward an executed copy of any now existing or future contract with any Licensee pertaining to an Account or Indebtedness which is to be sold to, or established and/or added by, MWCC pursuant to this Agreement. 36. Section 13.1 is deleted and substituted with the following: 13.1. Compliance with Law. MWCC's own actions and the actions of Persons on its behalf (or failures to act where any of the foregoing has a duty to act under this Agreement), shall comply with all federal, state, and local laws, statutes, ordinances, rules, regulations, orders and rulings, including, without limitation, court and FTC orders (to the extent such FTC 17 orders are set forth in Schedule 13.1 annexed hereto, as they may be modified, or entered against MWCC after the date hereof), ERISA, those regarding the collection, payment and deposit of employees' income, unemployment and social security taxes, and those relating to environmental matters. Without limiting the generality of the foregoing, MWCC shall additionally be obligated to cause all Accounts, Indebtedness, Credit Agreements, Lender Credit Card Agreements, periodic billing statements, other Account Documentation (other than those forms for which Seller is responsible as provided in Section 12.2), any other documents utilized by MWCC, insurance (to the extent of limitations on finance charges thereon), finance charges, and credit procedures to comply with those laws, statutes, ordinances, rules, regulations, orders and rulings during the term of this Agreement, including, but not limited to, so-called truth-in- lending or usury laws that may from time to time be in effect, which obligation shall include from time to time providing Seller with revisions to credit procedures, Credit Agreements, Lender Credit Card Agreements, periodic billing statements, other Account Documentation (other than those forms for which Seller is responsible as provided in Section 12.2) and any other documents utilized by MWCC, including those previously prepared by or on behalf of Seller, so that they so comply. Notwithstanding any of the foregoing, MWCC shall not be responsible during the period ending five (5) months after the date hereof for any non-compliance with any such laws, statutes, ordinances, rules, regulations, orders or rulings relating to any Account Documentation or credit procedures of Seller or Affiliates used or in effect at the Stated Time, unless such non-compliance arises out of a change in any such laws, statutes, ordinances, rules, regulations, ordinances or rulings after the Stated Time. It is understood that MWCC is not entitled to rely (except during the period ending five (5) months after the date hereof to the extent set forth above), as a basis for not complying with this section, at any time after the date hereof, on insurance (to the extent of limitations on finance charges thereon), finance charges, credit procedures, Credit Agreements, Lender Credit Card Agreements, periodic billing statements, other Account Documentation (other than those forms for which Seller is responsible as provided in Section 12.2), and other documents prepared or utilized by Seller during any period prior to the date hereof. MWCC shall not be responsible for noncompliance pursuant to this Section 13.1 where noncompliance is a result of Seller's failure to comply with any such matters, to the extent Seller is required by this Agreement to so comply. 37. Section 15.2(2)(iv) is deleted and substituted with the following: 18 (iv) If Seller chooses option (C) above, Seller shall have no rights in the Accounts and Indebtedness after the effective date of termination, except to the extent set forth in (C) above. In addition, Seller's obligations under Section 3.4 shall continue for a period of twelve (12) months after termination, provided that the aggregate of such purchases shall not exceed the amount of such purchases for the twelve (12) months immediately prior to termination. 38. The first sentence of Section 15.2(3)(ii) is deleted and substituted with the following: (ii) If Seller chooses either option (A) or (B) in Section 15.2(2)(i) above: (I) this Agreement shall continue in full force and effect (without any Maximum Investment limitation on MWCC's obligation to purchase, establish or add) until a date at which time this Agreement shall terminate (the "Termination Date") twelve (12) months from the Response Date, (II) if option (A) is chosen, Seller shall purchase, as of the opening of business on the Termination Date, all existing Accounts and Indebtedness then owned by MWCC at a price equal to the Net Receivable Balance on the opening of business on such date, and MWCC shall continue to service Accounts and Indebtedness in the same manner and with the same degree of care with which it had serviced Accounts and Indebtedness prior to the Termination Date for a fee equal to MWCC's fully allocated cost of operations relating to the Accounts plus ten percent (10%) of such costs, for a period of twelve (12) months after the Termination Date (in which case such costs shall be computed in accordance with MWCC's Accounting Practices, MWCC shall not change the components of such costs in anticipation of the effectiveness of these provisions, or immediately prior to or during such twelve (12) month period after the 19 Termination Date, but such costs shall include additional out-of-pocket expenses to MWCC required for the servicing of Accounts and Indebtedness, other than transition costs, and payments received on Accounts shall be remitted to Seller on the next Business Day after receipt), (III) if option (B) is chosen, MWCC shall provide the services described in Section 15.2(2)(iii) for the fee described therein, for a period of twelve (12) months after the Termination Date, and the other provisions of such Section 15.2(2)(iii) shall apply as if such period were the period prior to the effective date of termination referred to therein, (IV) at any time during and at the end of the twelve (12) month period after the Termination Date, Seller shall have the right to purchase (and MWCC shall have the same obligation to sell) all Accounts and Indebtedness as provided in Section 15.2(2)(iii) if option (B) is chosen, and (V) upon the expiration of the twelve (12) month period after the Termination Date or such earlier time during the twelve (12) month period after the Termination Date designated by Seller on the Response Date or upon three (3) months prior written notice, Seller shall have the same obligation to purchase such equipment, lease such facilities, employ such personnel and the same right to obtain a royalty-free license as set forth in Section 15.2(2)(ii) above. 39. Section 15.2(3)(iii) is deleted and substituted with the following: (iii) If Seller chooses option (C) in Section 15.2(2)(i) above, this Agreement shall terminate as of the date which is ninety (90) days from the Response Date, and thereupon the provisions of Section 15.2(2)(iv) shall apply. In addition, Seller's obligations under Section 3.4 shall continue for a period of twelve (12) months after termination, provided 20 that the aggregate of such purchases shall not exceed the amount of such purchases for the twelve (12) months immediately prior to termination. 40. Section 15.2(4) is deleted and substituted with the following: (4) If MWCC decides not to raise the Maximum Investment and Seller does not elect pursuant to Section 15.1(2) to terminate this Agreement as a result of such refusal (it being understood that Seller shall still, even if it exercises the rights set forth below, have the right at any time thereafter to so elect to terminate this Agreement if a subsequent request to increase the Maximum Investment is denied), this Agreement shall remain in full force and effect, subject to the following from and after the Response Date: (i) In the event the Net Receivable Balance exceeds ninety percent (90%) of the Maximum Investment, at Seller's option (A) random selections of whole new and old Accounts, excluding Accounts with Defaulted Indebtedness (new Accounts being Accounts for which Credit Agreements and Lender Credit Card Agreements are executed after the Response Date), or Accounts selected by some other method agreed to by the parties, shall be purchased, held or otherwise sold, financed or disposed of by Seller, such that the amount of Net Receivable Balance owned by MWCC is at all times no less than eighty percent (80%) of the Maximum Investment, and/or (B) Seller may require MWCC to increase the minimum monthly payments on all or specified Accounts, without the necessity of obtaining the Management Committee's approval, to the amounts provided in the forms of Credit Agreements annexed hereto as Exhibit 8.10, or such higher minimum payments as Seller requests, provided such higher minimum payments that are greater than those described in the forms of Credit Agreements annexed hereto as Exhibit 8.10 shall be implemented by MWCC, unless such change shall cause MWCC to receive less than a fair and reasonable 21 profit, as to which, if there is a dispute, shall be determined by the Management Committee. (ii) In the event that MWCC owns less than fifty percent (50%) of the aggregate of non-written-off Indebtedness (which may result from a growth in aggregate Indebtedness), a Person other than MWCC may at Seller's election service Accounts and Indebtedness that were purchased, held or otherwise sold, financed or disposed of by Seller pursuant to (i) above. (iii) Seller, at its election, may either continue to hold or otherwise sell, finance or dispose of any and all Accounts and Indebtedness not sold to MWCC or so purchased from MWCC, or sell to MWCC or request that MWCC establish and/or add (in which case MWCC shall purchase, establish and/or add) any or all of such Accounts and Indebtedness in accordance with the terms of this Agreement as though such sale and purchase or establishment and/or addition were originally being made and there had not been any refusal to increase the Maximum Investment, provided, however, that no Person other than MWCC shall have serviced such Accounts and Indebtedness, and, provided further, MWCC may, but shall not be obligated to, so purchase, establish and/or add any such Accounts and Indebtedness during any time during which the Net Receivable Balance owned by MWCC (but excluding for this purpose the Net Receivable Balance owned by any other Person, including Assignees, with respect to which MWCC has, in effect, no recourse liability (such recourse determination to be made by MWCC in its reasonable judgment)), equals or exceeds the Maximum Investment. (iv) If Seller purchases Credit Agreements, Lender Credit Card Agreements and Accounts and Indebtedness relating thereto pursuant to Section 22 15.2(4)(i)(A) above, it shall pay MWCC (A) a cash purchase price therefor equal to the then face value of the Indebtedness purchased, and (B) the unamortized portion of the reasonable marketing costs incurred by MWCC in initially obtaining and opening such transferred Accounts. The amortization schedule and determination of the amount of marketing cost incurred by MWCC in obtaining and opening such transferred Accounts shall be mutually approved by the parties hereto on a reasonable basis. In such event MWCC shall transfer to Seller free and clear of all Liens the Account Documentation, Accounts and Indebtedness relating thereto in a manner similar to that in which such items were originally transferred to MWCC, and shall execute and cooperate in the filing by Seller of all Code statements and other documents needed to so transfer such items. If Seller holds or otherwise sells new Credit Agreements or Lender Credit Card Agreements pursuant to Section 15.2(4)(i)(A), and if such new Credit Agreements or Lender Credit Card Agreements were generated through marketing efforts (as determined based on the source of account code) performed at MWCC's expense, Seller shall pay to MWCC the marketing cost incurred by MWCC allocable to each such new Credit Agreement or Lender Credit Card Agreement. The amount of such allocable marketing cost shall be mutually approved by the parties hereto on a reasonable basis. If any Credit Agreements or Lender Credit Card Agreements for which Seller paid a portion of the marketing cost pursuant to this subsection (iv) is purchased by MWCC pursuant to Section 15.2(4)(iii), MWCC shall pay to Seller any then-remaining unamortized marketing cost relating to such Credit Agreements or Lender Credit Card Agreements, all as mutually approved by the parties hereto on a reasonable basis. 23 (v) Subject to the provisions of subsection (ii) above, if Seller elects the option described in Section 15.2(4)(i)(A) above, MWCC shall collect and service any Accounts in question for Seller's or its designee's account in the manner MWCC collects and services the Accounts and Indebtedness owned by it, and Seller shall pay, or cause to be paid, to MWCC a service fee equal to its pro rata share of MWCC's fully allocated cost of operations relating to the Accounts not owned by MWCC but serviced by MWCC, plus ten percent (10%) of such costs. Such costs shall be computed in accordance with MWCC's Accounting Practices. MWCC shall not change the components of such costs in anticipation of the effectiveness of these provisions, or immediately prior to or after the effective time of this provision, but such costs shall include all additional out-of-pocket expenses to MWCC required for the servicing of Accounts and Indebtedness. Payments received on such Accounts shall be remitted to Seller on the next Business Day after receipt. 41. Section 16.1(2) is deleted and substituted in its place is the following: (2) Seller shall (a) fail or neglect to perform any of the covenants contained in Section 12.2 of this Agreement (provided that such failure or neglect shall occur on a repeated and sustained basis with a conscious disregard of Seller's obligations with respect thereto, and relate to laws and regulations governing Credit Agreements, Lender Credit Card Agreements, Accounts and Indebtedness owned by MWCC), and such failure or neglect shall remain unremedied for a period of thirty (30) days after notice thereof by MWCC to Seller, or if such failure or neglect is not reasonably susceptible of being cured within such thirty (30) day period, if Seller fails to commence to cure such failure or neglect during such thirty (30) day period and diligently proceed to cure thereafter, or (b) intentionally (1) refuse to sell, or cause to be sold, Accounts and Indebtedness to MWCC or (2) interfere with the establishment or addition of Accounts and Indebtedness by MWCC as required by this Agreement with the intent to avoid its obligations hereunder (which intent shall be deemed not to exist if there is a good 24 faith dispute as to whether Seller is so obligated to sell or allow MWCC to establish or add). 42. Section 16.2(3) is deleted and substituted in its place is the following: (3) MWCC shall fail or neglect to perform any of the covenants contained in Section 13.1 of this Agreement (provided that such failure or neglect shall occur on a repeated and sustained basis with a conscious disregard of MWCC's obligations with respect thereto and relate to laws and regulations governing Credit Agreements, Lender Credit Card Agreements, Accounts and Indebtedness owned by MWCC), and such failure or neglect shall remain unremedied for a period of thirty (30) days after notice thereof by Seller to MWCC, or if such failure or neglect is not reasonably susceptible of being cured within such thirty (30) day period, if MWCC fails to commence to cure such failure, neglect or refusal during such thirty (30) day period and diligently proceed to cure thereafter. 43. Except as specifically provided herein, the terms and conditions of the Agreement as heretofore amended shall continue in full force and effect and shall be fully binding on the parties hereto. Upon the execution of this Amendment, each reference in the Agreement to "this Agreement," "hereunder," "hereof," or words of like import, shall mean and be a reference to the Agreement as amended previously and hereby. In the event of any conflict between the terms of the Agreement as amended and the terms of this Amendment, the terms of this Amendment shall prevail. 44. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, Seller and MWCC have executed this Amendment as of the date first set forth above. MONTGOMERY WARD & CO., INCORPORATED By: /s/ Philip D. Delk --------------------------------- Name: Philip D. Delk ------------------------------- Title: Vice President ------------------------------ 25 MONTGOMERY WARD CREDIT CORPORATION By: /s/ Colleen R. Goldhammer ------------------------- Name: Colleen R. Goldhammer ------------------------- Title: President ------------------------- General Electric Capital Corporation, as guarantor of MWCC's obligations under the Account Purchase Agreement, has approved the terms of the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment and Ninth Amendment and hereby approves the terms of the Sixth Amendment, Seventh Amendment, Eighth Amendment and this Tenth Amendment, and agrees that its Guaranty is neither invalidated by the amendments heretofore made nor by this Tenth Amendment to the Account Purchase Agreement and that its Guaranty, dated June 24, 1988, and amended May __, 1994, continues in full force and effect in accordance with its terms with respect to the Account Purchase Agreement as so amended. GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Gail N. Lanik ----------------------------- Name: Gail N. Lanik --------------------------- Title: Vice President -------------------------- 26 EX-10.(II)(C)(2) 7 EX-10.(II)(C)(2) Exhibit 10(ii)(C)(2) SECOND AMENDMENT TO EXHIBITS A & B OF THE SIGNATURE CREDIT AGREEMENT AMENDMENT, made and entered into as of June 16, 1994, by and among SIGNATURE FINANCIAL/MARKETING, INC. ("Signature"), MONTGOMERY WARD & CO., INCORPORATED ("Montgomery Ward"), and MONTGOMERY WARD CREDIT CORPORATION ("MWCC"). W I T N E S S E T H: -------------------- WHEREAS, Montgomery Ward and MWCC are parties to an Account Purchase Agreement dated as of June 24, 1988, as amended by a letter agreement dated April 21, 1989, an agreement dated December 26, 1989, a letter agreement dated April 24, 1990, a letter agreement dated as of December 26, 1990, an agreement dated May 23, 1992, a letter agreement dated December 29, 1992, a letter agreement dated April 29, 1993, a letter agreement dated September 15, 1993 and an amendment dated February 16, 1994 pursuant to which MWCC agreed to purchase, and has purchased, Accounts and Indebtedness from Montgomery Ward upon the terms and subject to the conditions of the Account Purchase Agreement; and WHEREAS, Montgomery Ward and MWCC, pursuant to an amendment to the Account Purchase Agreement dated as of the date hereof (with the Account Purchase Agreement and amendments referenced above, collectively referred to as the "Account Purchase Agreement"), have agreed that, in the State of Washington, MWCC will no longer purchase Accounts and Indebtedness from Montgomery Ward and instead will itself establish Accounts and add Indebtedness pursuant to Lender Credit Card Agreements; and WHEREAS, Signature, Montgomery Ward and MWCC have entered into a letter agreement dated as of June 24, 1988, as amended by a letter agreement dated September 14, 1988, and an amendment dated May 23, 1992 (collectively, the "Signature Credit Agreement"); and WHEREAS, Signature, Montgomery Ward and MWCC desire to amend Exhibits A & B of the Signature Credit Agreement in accordance with the terms and conditions hereinafter set forth to take into account the use of Lender Credit Card Agreements in the State of Washington; NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions hereinafter set forth, the parties hereto hereby agree as follows: 1. Capitalized terms used herein which are not otherwise defined shall have the same meaning as in the Account Purchase Agreement. 2. Paragraph 1 of Exhibit A to the Signature Credit Agreement is deleted and substituted in its place is the following: 1. Purchases of Products; Definitions. MWCC will allow customers of Signature who hold valid Montgomery Ward credit cards or who are authorized users of Montgomery Ward credit cards to pay for Products (as hereafter defined) purchased from Signature or its Subsidiaries or licensees pursuant to the payment terms of (a) the Credit Agreement between the customer and Montgomery Ward or (b) the Lender Credit Card Agreement between the customer and MWCC in the State of Washington. As used herein, the term "Account Debtor" means each customer of Signature who elects to pay for Products pursuant to a Credit Agreement or, in the State of Washington, a Lender Credit Card Agreement; the term "Products" means all insurance products, financial services products, membership or continuity-type products or services and all other related products or services now or hereafter marketed and sold by Signature or its Subsidiaries or licensees; and the term "Effective Date" means the effective date of the definitive Servicing Agreement, as agreed to by MWCC and Signature. Capitalized terms used but now defined herein have the same meaning as in the Account Purchase Agreement. 3. Paragraph 1 of Exhibit B to the Signature Credit Agreement is deleted and substituted in its place is the following: 1. Montgomery Ward will continue to pay to Signature the face value of all insurance premiums, club fees and other revenue which result from a sale of Products to an Account Debtor. The Indebtedness thereby created will be purchased by MWCC and sold by Montgomery Ward as provided in Section 3.1(1) of the Account Purchase Agreement, except that, with respect to Indebtedness of Account Debtors that purchase Products pursuant to Lender Credit Card Agreements in the State of Washington, MWCC will establish and/or add such Indebtedness and pay the face value thereof to 2 Montgomery Ward as provided in Section 3.1(2) of the Account Purchase Agreement and Montgomery Ward will pay the face value of such Indebtedness to Signature. 4. Except as specifically provided herein, the terms and conditions of the Signature Credit Agreement shall continue in full force and effect and shall be fully binding on the parties hereto. Upon the execution of this Amendment, each reference in the Signature Credit Agreement to "this Agreement," "hereunder," "hereof," or words of like import, shall mean and be a reference to the Signature Credit Agreement as amended hereby. In the event of any conflict between the terms of the Signature Credit Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. 5. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, Signature, Montgomery Ward and MWCC have executed this Amendment as of the date first set forth above. SIGNATURE FINANCIAL/MARKETING, INC. By: /s/ John B. Euwema -------------------------------- Name: John B. Euwema ----------------------------- Title: Sr VP, Sec. & General Counsel ----------------------------- MONTGOMERY WARD & CO., INCORPORATED By: /s/ Philip D. Delk -------------------------------- Name: Philip D. Delk ------------------------------ Title: Vice President ----------------------------- MONTGOMERY WARD CREDIT CORPORATION By: /s/ Colleen R. Goldhammer -------------------------------- Name: Colleen R. Goldhammer ------------------------------ Title: President ----------------------------- 3 EX-10.(IV)(A)(II)(A) 8 EX-10.(IV)(A)(II)(A) EXHIBIT 10.(iv)(A)(ii)(a) MONTGOMERY WARD & CO., INCORPORATED STOCK OWNERSHIP PLAN 1. Purpose. The Montgomery Ward & Co., Incorporated Stock Ownership Plan ("Program") is comprised of two Plans, the Associate Plan and the Director Plan (Associate Plan and Director Plan, collectively or individually, "Plan"). The purpose of the Associate Plan of the Program is to attract and retain outstanding individuals as associates, advisors and consultants of Montgomery Ward Holding Corp. ("Company"), Montgomery Ward & Co., Incorporated ("Ward"), and their subsidiaries and affiliates (Company, Ward and their subsidiaries and affiliates, collectively or individually, "Ward Group"), excluding associates, advisors and consultants who are also directors of the Company, and to provide incentives for such associates, advisors and consultants to expand and improve the profits and achieve the objectives of the Ward Group by providing to such individuals opportunities to acquire shares of Class A Common Stock, Series 1 (par value $.01 per share) ("Series 1 Shares") and Class A Common Stock, Series 2 (par value $.01 per share) ("Series 2 Shares") of the Company (the Series 1 Shares and the Series 2 Shares being hereinafter collectively referred to as "Shares") and thereby provide such individuals with a greater proprietary interest in and closer identity with the Ward Group and its financial success. The purpose of the Director Plan of the Program is to attract and retain outstanding individuals as directors of the Company and to provide incentives for such directors to expand and improve the profits and achieve the objectives of the Ward Group by providing to such individuals opportunities to acquire Shares and thereby provide such individuals with a greater proprietary interest in and closer identity with the Ward Group and its financial success. Pursuant to this Program, associates, directors, advisors and consultants of the Ward Group may be awarded Shares ("Awards"), provided opportunities to purchase Shares ("Purchase Rights"), and granted nonqualified stock options ("Options") to acquire Shares. 2. Administration. This Program will be administered by two separate committees. The Associate Plan will be administered by the Associated Plan Committee and the Director Plan will be administered by the Director Plan Committee (Associate Plan Committee and Director Plan Committee, collectively or individually, "Committee"). Each Committee shall be comprised of such persons as the Board of Directors of the Company ("Board") may from time to time designate and shall be constituted as to permit this Program to comply with Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended ("Securities Exchange Act of 1934") or any successor provision. Each Committee shall interpret the respective Plan it administers and shall prescribe, amend and rescind rules and regulations relating thereto and make all other determinations necessary or advisable for the administration of such Plan. Any such action by either Committee shall be final and conclusive. A majority of the members of a Committee shall constitute a quorum and all determinations of a Committee shall be made by a majority of its members. Any determination of a Committee under this Program may be made without notice of meeting of the Committee by a writing signed by a majority of the Committee members. The Associate Plan Committee shall determine, within the limits of the express provisions of this Program, those associates, advisors and consultants of the Ward Group (excluding associates, advisors and consultants who are also directors of the Ward Group) to whom, and the time or times at which, Awards, Purchase Rights and Options shall be granted. The Director Plan Committee shall determine, within the express provisions of this Progam, those directors of the Company to whom, and the time or times at which, Awards, Purchase Rights and Options shall be granted to directors of the Company. Notwithstanding the foregoing, Awards, Purchase Rights and Options, in the aggregate, granted on or after January 1, 1990 with respect to Series 2 Shares in excess of the following amounts on a cumulative basis prior to December 31 of the following years may only be granted with the prior approval of the Board: Year Shares ---- ------ 1990 1,500,000 1991 2,300,000 1992 3,100,000 1993 3,700,000 Each respective Committee shall also determine the number of Shares to be subject to each Award, Purchase Right and Option, the duration of each Purchase Right and Option, the exercise price (Option Price) under each Option, the purchase price under each Purchase Right, the time or times within which (during the term of the Option) all or portions of each Option may be exercised, and whether cash, Shares, or other property may be accepted in full or partial payment upon exercise of an Option or purchase of Shares pursuant to a Purchase Right. In making such determinations, the respective Committee may take into account the nature of the services rendered by the Participants, their present and potential contributions to the Ward Group's success and such other factors as the Committee in its discretion shall deem relevant. 3. Participants. The Participants in the Associate Plan will consist of such associates, advisors and consultants of the Ward Group (excluding associates, advisors and consultants who are also directors of the Company) as the Associate Plan Committee in its sole discretion from time to time designates within the limits of the express provisions of this Program. The Participants in the Director Plan will consist of such directors of the Ward Group as the Director Plan Committee in its sole discretion from time to time designates within the limits of the express provisions of this Program. A Committee's designation of a Participant in any year shall not require either Committee to designate such person in any other year. Each Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the terms of their respective Awards, Purchase Rights and Options, including without limitation: (i) the financial condition of the Ward Group, (ii) anticipated profits of the current or future years, (iii) contributions of Participants to the profitability and development of the Ward Group, both present and future, and (iv) other compensation provided to Participants. 4. Terms and Conditions of Awards. Awards granted under this Program shall be upon such terms and conditions as the respective Committee shall from time to time determine, subject to the provisions of this Program. Awards may be subject to provisions (whether or not applicable to the Awards granted to any other Participant) as the respective Committee, in its sole discretion determines appropriate, including, without limitation, restrictions on resale or other disposition, such provisions as may be appropriate to comply with federal or state securities laws and stock exchange requirements, and undertakings or conditions as to the Participant's employment in addition to those specifically provided for under this Program including the establishment of vesting schedules with respect to the ownership of Shares awarded hereunder. 5. Terms and Conditions of Purchase Rights. The Purchase Rights granted under this Program shall be in such form and upon such terms and conditions as the respective Committee shall from time to time determine, subject to the provisions of this Program. Shares may be purchased pursuant to Purchase Rights by giving written notice to the Treasurer of the Company stating the number of 2 Shares which are being purchased and tendering payment therefor. In the discretion of the respective Committee, payment for Shares may be made in cash, other Shares or other property. The purchase of Shares pursuant to any Purchase Right may be subject to other provisions (whether or not applicable to the Purchase Right awarded to any other Participant) as the respective Committee, in its sole discretion determines appropriate, including, without limitation, restrictions on resale or other disposition, such provisions as may be appropriate to comply with federal or state securities laws and stock exchange requirements, and undertakings or conditions as to the Participant's employment in addition to those specifically provided for under this Program including the establishment of vesting schedules with respect to the ownership of Shares purchased hereunder. 6. Terms and Conditions of Options. The Options granted under this Program shall be in such form and upon such terms and conditions as the respective Committee shall from time to time determine, subject to the provisions of this Program, including the following: (a) Option Price The Option price of each Option to purchase Shares shall be at 100% of the fair market value of the Shares subject to such Option at the time such Option is granted or at such other price determined by the respective Committee; provided, however, that the Option price shall in no event be less than the par value of the Shares subject to such Option. The fair market value of Shares is to be determined in accordance with procedures established by the respective Committee. (b) Option Term Each Option granted under this Program shall be for such period as the respective Committee shall determine, which period may include, without limitation, early termination of the Option upon the Participant's termination of employment. No Option, however, may be for a period more than ten years from the date the Option is granted. (c) Method of Exercise Options may be exercised by giving written notice to the Treasurer of the Company, stating the number of Shares with respect to which the Option is being exercised and tendering payment therefor. In the discretion of the respective Committee, payment for Shares may be made in cash, other Shares or other property. The award of any Option may be subject to other provisions (whether or not applicable to the Option awarded to any other Participant) as the respective Committee, in its sole discretion determines appropriate, including, without limitation, restrictions on resale or other disposition, installment exercise limitations, such provisions as may be appropriate to comply with federal or state securities laws and stock exchange requirements, and undertakings or conditions as to the Participant's employment in addition to those specifically provided for under this Program including the establishment of vesting schedules with respect to the ownership of Shares purchased upon the exercise of Options granted hereunder. 7. Shares. The total number of Shares allocated to this Program and available to designated 3 Participants under this Program is One Million (1,000,000) Series 1 Shares and Five Million Four Hundred Twelve Thousand (5,412,000) Series 2 Shares, except as such numbers of Shares shall be adjusted in accordance with the provisions of Section 11. The maximum number of Shares available to any Participant under this Program through Awards, Purchase Rights and Options is one million (1,000,000) Shares, except as such number of Shares shall be adjusted in accordance with the provisions of Section 11. Each Award, Purchase Right and Option when granted shall state the number of Shares to which it pertains. Such Shares may be either authorized but unissued Shares or treasury Shares. If any Purchase Right or Option granted under this Program expires unexercised, or is terminated or ceases to be exercisable for any other reason without having been fully exercised prior to the end of the period during which Purchase Rights or Options may be granted under this Program, or if any Award, Purchase Right or Option is surrendered by a Participant for cancellation, the Shares theretofore subject to such Award, Purchase Right or Option or to the unexercised portion of such Purchase Right or Option shall again become available for new Awards, Purchase Rights and Options to be granted under this Program to any eligible person (including the holder of such former Award, Purchase Right or Option). If any Shares awarded under this Program or purchased pursuant to Purchase Rights or the exercise of Options ("Plan Shares") are repurchased by the Company pursuant to Section 10 prior to the end of the period during which Awards, Purchase Rights and Options may be granted under this Program, the repurchased Shares shall again become available for new Awards, Purchase Rights and Options to be granted under this Program to any eligible person; provided, however, that in no event may the total number of Shares issued under this Program exceed the aggregate number of Shares so reserved in this Section for issuance. 8. Notices. ------- (a) Awards ------ Awards granted pursuant to this Program shall be authorized by the respective Committee and shall be evidenced by notices ("Award Notices") in such form as the respective Committee shall from time to time determine. Such Award Notices shall state: (i) the number of Shares awarded, and (ii) such other information as the respective Committee deems appropriate or necessary. The terms and conditions of each Award Notice must be consistent with the provisions of this Program and will be applicable only to the Award that it announces. (b) Purchase Rights --------------- Purchase Rights granted pursuant to this Program shall be authorized by the respective Committee and shall be evidenced by notices ("Purchase Right Notices") in such form as the respective Committee shall from time to time determine. Such Purchase Right Notices shall state: (i) the number of Shares with respect to which the Purchase Right is granted, (ii) the purchase price, (iii) the duration of the Purchase Right, (iv) the method of purchasing such Shares, and (v) such other information as the respective Committee deems appropriate or necessary. The terms and conditions of each Purchase Right Notice must be consistent with the provisions of this Program and will be applicable only to the grant that it announces. 4 (c) Options ------- Options granted pursuant to this Program shall be authorized by the respective Committee and shall be evidenced by notices ("Option Notices") in such form as the respective Committee shall from time to time determine. Such Option Notices shall state: (i) the number of Shares with respect to which the Option is granted, (ii) the Option price, (iii) the Option exercise schedule, (iv) the Option term, (v) the method of exercising such Option, and (vi) such other information as the respective Committee deems appropriate or necessary. The terms and conditions of each Option Notice must be consistent with the provisions of this Program and will be applicable only to the grant that it announces. 9. Nontransferability. During the lifetime of a Participant, any Purchase Right or Option granted to the Participant shall be exercisable only by the Participant's guardian or legal representative. No Purchase Right or Option shall be assignable or tranferable, except by will or by the laws of descent and distribution. The granting of a Purchase Right or Option shall impose no obligation upon the Participant to purchase Shares pursuant to the Purchase Right or exercise the Option, respectively. 10. Plan Share Agreements. Each holder of an Award, Purchase Right or Option shall agree to such terms and conditions in connection with the Award or the purchase of Shares pursuant to the Purchase Right or the exercise of the Option, including restrictions on the disposition of Plan Shares, as the respective Committee may deem appropriate. The certificates evidencing the Plan Shares may bear a legend referring to the terms and conditions contained in the respective Plan Share agreement and this Program, and the Company may place a stop transfer order with its transfer agent against the transfer of such Plan Shares. 11. Adjustments. ----------- (a) Capital Adjustments ------------------- If the Shares should, as a result of any stock dividend, stock split, other subdivision or combination of Shares, or any reclassification, recapitalization or otherwise, be increased or decreased, the number of Shares covered by each outstanding Purchase Right or Option, the exercise price for each outstanding Purchase Right or Option and the total number of Shares reserved for issuance under this Program shall be adjusted as determined by the respective Committee to reflect such action. Any new shares or other securities issued with respect to Shares shall be deemed Shares. (b) Transactional Adjustments ------------------------- Subject to any required action by the Company's or Ward's stockholders, if the Company or Ward shall be a party to a transaction involving a merger or consolidation (except a merger or consolidation which does not require approval of the Company's or Ward's stockholders under the provisions of the applicable state corporation law) or a sale of all or substantially all of its assets, or if the Company or Ward shall dissolve or be liquidated, or upon the occurrence of the sale or issuance of shares of the Company pursuant to one or more registration statements under the 5 Securities Act of 1933 and under Rule 144 (other than pursuant to this Program) which sale or issuance results in 25% or more of the total number of outstanding shares of voting common stock of the Company having been so issued or sold (any such merger, consolidation, sale, dissolution, liquidation or sale of shares being herein referred to as a "Transaction"), the respective Committee may authorize the issuance, exercise or assumption of Purchase Rights and Options in connection with such Transaction upon such terms and conditions as it may deem appropriate. The respective Committee shall also have the right to provide for the continuation of Purchase Rights and Options or for other equitable adjustments (by any means, such as, for example, cash payment or conversion into other property or securities) in connection with a Transaction. 12. Legal and Other Requirements. The obligation of the Company to deliver Shares pursuant to Awards, Purchase Rights and Options granted under this Program shall be subject to all applicable laws, regulations, rules and approvals, including, but not by way of limitation, the effectiveness of a registration statement under the Securities Act of 1933, if deemed necessary or appropriate by the respective Committee, covering the Shares reserved for issuance upon Awards, purchases pursuant to Purchase Rights and exercise of Options. A participant shall have no rights as a stockholder with respect to any Shares covered by Awards, Purchase Rights or Options granted to or Purchase Rights or Options exercised by, the Participant until the date of delivery of a stock certificate to the Participant for such Shares. Shares issued hereunder may be legended as the respective Committee shall deem appropriate to reflect the restrictions imposed under the Program or by securities laws generally. No adjustment other than pursuant to Section 11 hereof shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is delivered. 13. Tax Withholding. The Ward Group shall comply with the obligations imposed on the Ward Group under applicable tax withholding laws, if any, with respect to Awards, Purchase Rights and Options granted hereunder, and shall be entitled to do any act or thing to effectuate any such required compliance, including, without limitation, withholding from amounts payable by the Ward Group to a Participant and including making demand on a Participant for the amounts required to be withheld. A Participant, or upon the Participant's death, the Participant's beneficiary, may satisfy, in whole or in part, the obligation to pay the Ward Group any amount required to be withheld under the applicable federal, state and local income tax laws in connection with the grant of an Award or exercise of a Purchase Right or Option under this Program by either: (1) having the Ward Group withhold from the Shares to be acquired upon the grant of the Award or exercise of the Purchase Right or Option, or (ii) delivering to the Ward Group either previously acquired Shares or Shares acquired upon the grant of the Award or exercise of the Purchase Right or Option which the Participant or beneficiary was unconditionally obligated to deliver to the Ward Group. The Shares withheld or delivered shall be valued at their fair market value as of the date the amount of tax to be withheld is determined ("Tax Date"). The fair market value of Shares shall be determined in accordance with procedures established by the respective Committee. Any amounts required to be withheld in excess of the value of Shares withheld or delivered shall be paid in cash or withheld from other compensation paid by the Ward Group. Elections by Participants or beneficiaries to have Shares withheld or delivered for this purpose shall be subject to the following restrictions: (i) elections must be made prior to the Tax Date, (ii) elections are irrevocable, (iii) elections are subject to the disapproval of the respective Committee, 6 (iv) if the Participant is subject to Section 16(b) of the Securities Exchange Act of 1934 ("Section 16(b)"), the election may not be made with respect to any Award or within six months after the grant of the Purchase Right or Option unless the election is made after the Participant becomes disabled or dies, and (v) if the Participant is subject to Section 16(b), the election must be made at least six months prior to the Tax Date or within a period beginning on the third business day following the release of the Company's quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. 14. No Contract of Employment. Neither the adoption of this Program nor the grant of any Awards, Purchase Rights or Options, nor ownership of Shares shall be deemed to obligate the Ward Group to continue the appointment, employment, or engagement of any eligible person for any particular period. 15. Indemnification of Committee. The members of the Committee shall be indemnified by the Company to the fullest extent permitted by Delaware law, the Company's Certificate of Incorporation and the Company's by-laws. 16. Amendment and Termination of Program. The Company may amend this Program from time to time or terminate this Program at any time, but no such action shall reduce the number of Shares subject to the then outstanding Purchase Rights or Options granted to any Participant or adversely to the Participant change the terms and conditions of outstanding Purchase Rights or Options without the Participant's consent; provided, however, that to the extent deemed appropriate by the Committee, shareholder approval shall be necessary to adopt any amendment if the adoption of such amendment without shareholder approval would cause this Program to no longer comply with Rule 16b-3 or any successor rule or regulatory requirement. Without further action by the Board or the stockholders of the Company, this Program shall terminate on the tenth anniversary of the effective date of this Program. 17. Delaware Law to Govern. This Program shall be governed by and construed in accordance with the laws of the State of Delaware. 18. Effective Date of Program. This Program originally became effective July 19, 1988. 7 EX-10.(IV)(A)(V) 9 EX-10.(IV)(A)(V) Exhibit 10.(iv)(A)(v) MONTGOMERY WARD & CO., INCORPORATED STOCK OWNERSHIP PLAN TERMS AND CONDITIONS as amended and restated May 20, 1994 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Introductory Matters............... 1 1.1 Adoption of Recitals............................................ 1 1.2 Definitions..................................................... 1 1.3 Transferability of Certain Shares............................... 11 1.4 Duration of Certain Portions of Article II and Certain Portions of Article III....................................... 11 1.5 Duration of Certain Portions of Article V....................... 11 1.6 Applicability of Terms and Conditions; Continuation of Terms and Conditions................................................ 11 1.7 Withholding..................................................... 11 1.8 Shortening or Lengthening of Option Periods..................... 12 1.9 Execution of Voting Trust Agreement............................. 12 ARTICLE II Voluntary Transfers of Shares.................. 12 2.1 General Effect of Terms and Conditions.......................... 12 2.2 Certain Permitted Transfers of Shares........................... 12 2.3 Certain Prohibited Transfers.................................... 13 2.4 Notice of Transfer of Shares.................................... 14 2.5 Form of Transfer Notice......................................... 14 2.6 Approval of Board of Directors.................................. 14 2.7 Options......................................................... 14 2.8 Transfer if Options Not Exercised............................... 15 2.9 Exercise of Options for Less than All of the Shares............. 15 2.10 Closing of Exercise of Options.................................. 16 2.11 Effect of Shares in the Hands of Third-Party Transferee......... 16 2.12 Termination of GE Capital's Rights.............................. 16 ARTICLE III Purchases of Shares Upon Termination of Employment........... 16 3.1 Termination of Employment of Participant........................ 16 3.2 Death or Total Permanent Disability of a Participant............ 17 3.3 Death of Participant Following Termination of Employment........ 18 3.4 Notice of Death................................................. 18 3.5 Purchase Price of Shares........................................ 18 3.6 Manner of Payment............................................... 19 3.7 Notes and Security.............................................. 19 3.8 Fair Market Value............................................... 20 3.9 Closing......................................................... 23 3.10 Priorities...................................................... 24 3.11 Failure to Deliver Shares....................................... 24
i 3.12 Resale of Shares............................. 24 3.13 Modification of Options...................... 25 ARTICLE IV Certain Limitations on Purchases of Shares. 25 4.1 Restrictions on the Company's Rights and/or Obligation to Purchase Shares.............. 25 4.2 Definition of the Limitations................ 27 4.3 Cash Payments Limitation..................... 27 ARTICLE V Corporate Governance Matters.............. 28 5.1 Voting of Shares Held by Participants........ 28 5.2 Election of Directors........................ 28 5.3 Recapitalization............................. 29 ARTICLE VI Confidential Information.................. 29 6.1 No Disclosure of Confidential Information.... 29 6.2 Limitations on No Disclosure Covenant........ 29 6.3 Return of Documents.......................... 29 6.4 Enforcement.................................. 30 ARTICLE VII General Matters........................... 30 7.1 Legend on Certificates....................... 30 7.2 Termination and Amendment of Terms and Conditions................................. 30 7.3 Not an Employment Agreement.................. 31 7.4 Notices...................................... 31 7.5 Miscellaneous................................ 32 7.6 Descriptive Headings......................... 32 7.7 Waivers...................................... 32 7.8 Binding Effect; Enforcement.................. 32 7.9 Applicable Law............................... 33 7.10 Severability................................. 33 7.11 Resolution of Certain Ambiguities and Conflicts.................................. 33 7.12 Authority to Give Consents, Approvals, etc... 33
ii MONTGOMERY WARD & CO., INCORPORATED STOCK OWNERSHIP PLAN TERMS AND CONDITIONS AS AMENDED AND RESTATED RECITALS: A. Montgomery Ward Holding Corp., a Delaware corporation ("Company") owns all of the outstanding stock of Montgomery Ward & Co., Incorporated, an Illinois corporation ("Ward"). B. The Company currently has an authorized capitalization of 25,000,000 shares of Class A Common Stock, Series 1, par value $.01 per share; 5,412,000 shares of Class A Common Stock, Series 2, par value $.01 per share; 400,000 shares of Class A Common Stock, Series 3, par value $.01 per share; 25,000,000 shares of Class B Common Stock, par value $.01 per share; and 750 shares of Senior Preferred Stock, par value $1.00 per share. C. The Company has adopted, for the benefit of its employees and the employees of Ward and its subsidiaries, a stock ownership plan known as the Montgomery Ward & Co., Incorporated Stock Ownership Plan ("Plan"). D. The parties desire to set forth certain restrictions with respect to the ownership of shares of Class A Common Stock, Series 1 ("Series 1 Shares"), Class A Common Stock, Series 2 ("Series 2 Shares"), and Class A Common Stock, Series 3 ("Series 3 Shares"), of the Company (the Series 1 Shares, Series 2 Shares and Series 3 Shares being hereinafter collectively referred to as "Class A Shares") and shares of Class B Common Stock of the Company ("Class B Shares"), certain options and obligations to purchase such shares, and certain matters relating to corporate governance of the Company, all as herein set forth. E. Except as otherwise provided herein, all of the Awards and grants of Purchase Rights or Options made under the Plan are subject to the following Terms and Conditions, and each Participant shall be required to agree to execute a counterpart hereof prior to or concurrently with receipt of his or her Award, or exercise of a Purchase Right or Option. AGREEMENTS: NOW, THEREFORE, the undersigned Participant hereby agrees as follows: ARTICLE I Definitions and Introductory Matters 1.1 Adoption of Recitals. The undersigned hereby adopts the foregoing Recitals and agrees and affirms that the construction of these Terms and Conditions will be guided thereby. 1.2 Definitions. For the purposes hereof: (a) "Acquisition Price" shall mean the price paid to the Company (as herein defined) for a Share (as herein defined) purchased from the Company and $.01 per Share for Shares received as Awards (in each case as adjusted by the Company on an equitable basis for stock dividends, stock splits, reclassifications and like actions); (b) "Act" shall mean the Securities Act of 1933, as amended; (c) "Adjustment Period" shall have the meaning set forth in Section 3.8(a)(i); (d) "Applicable Date" shall have the meaning set forth in Section 3.8(a); (e) "Article III Closing" and "Article III Closing Date" shall have the meanings set forth in Section 3.9; (f) "Average Closing Price" shall have the meaning set forth in Section 3.8(b); (g) "Award" shall mean an award of Shares without cash consideration pursuant to the terms of the Plan; (h) Intentionally omitted; (i) "Board of Directors" shall mean the board of directors of the Company; (j) "Brennan" shall mean Bernard F. Brennan; (k) "Cash Payments Limitation" shall have the meaning set forth in Section 4.3; (l) "Cause" shall mean any of the following with respect to a Participant (as herein defined): (i) the commission of any crime, whether or not involving any member of the Ward Group (as herein defined), which constitutes a felony in the jurisdiction involved; (ii) the sale, use or possession on the premises of any member of the Ward Group of a controlled substance whose sale, use or possession is illegal in the manner used or possessed and in the jurisdiction involved; (iii) the repeated consumption of drugs or alcohol that interferes with a Participant's ability to discharge his or her assigned responsibilities; (iv) an intentional violation of the provisions of Section 6.1 of these Terms and Conditions; (v) the intentional and repeated failure on the part of a Participant to perform such duties as may be delegated to him or her and which are commensurate with his or her employment position; or 2 (vi) the unlawful taking or misappropriation of any property belonging to any member of the Ward Group or in which any member of the Ward Group has an interest; (m) "Class A Amount" shall mean a number of Class A Shares equal to the Series 1 Amount (as herein defined) or, if less, the Outstanding Amount (as herein defined). For the purposes of Section 3.8(a)(iii), Shares which are subject to purchase under outstanding Purchase Rights or Options (whether or not currently exercisable) granted under the Plan shall be deemed to be outstanding; (n) "Class A Shares" shall mean shares of Class A Common Stock, par value $.01 per share, of the Company without distinction as to series; (o) "Commission" shall mean the Securities and Exchange Commission; (p) "Common Stock" shall, except as otherwise specifically provided herein, mean the shares of common stock of the Company, without distinction as to class or series, and shall include certificates of beneficial interest issued by the Voting Trustee (as herein defined), pursuant to the Voting Trust Agreement (as herein defined); (q) "Company" shall mean Montgomery Ward Holding Corp., a Delaware corporation; (r) "Competing Business" shall mean any person or entity engaged, in any area of the world, directly or indirectly, in any retail merchandising business conducted from multiple retail locations, of a type engaged in by any member of the Ward Group, or any business of the type engaged in by Signature Financial Marketing, Inc. ("Signature") or any of its subsidiaries (as long as Signature or such subsidiary is a member of the Ward Group), other than the insurance business, as of the time of the complained of act; (s) "Confidential Information" shall mean competitive data, trade secrets or confidential trade information in the possession of the Ward Group which is not generally known to others and the confidentiality of which the Ward Group has taken reasonable steps to protect, but does not include general business knowledge acquired by a Participant; (t) Intentionally omitted; (u) "Designated Management Optionees" shall mean those Management Shareholders (as herein defined) or any member or members of their Families (as defined in the Management Stockholders Agreement, as herein defined) or Participants or any member or members of their respective Families (as herein defined), who are designated in writing by the Designator (as herein defined), with concurrent notice to the Company, as having the right to exercise a specifically designated option to purchase a specifically designated number of Shares pursuant to Article II or III. The options so designated may not, in the aggregate, exceed the number of Shares which, at the time of the designation, are subject to purchase pursuant to Article II or Article III, but in making such designation, the Designator may designate alternate Designated Management Optionees who shall have options to purchase Shares if the Persons designated as primary Designated Management Optionees do not exercise the designated options. The Designator may designate a member of the Committee (as herein defined), or a member of his 3 Family, as a Designated Management Optionee only as provided elsewhere in this Agreement. Each designation of a Designated Management Optionee shall be made in writing and delivered by the Designator to the Designated Management Optionee and the Company. By written notice delivered to a Designated Management Optionee, with concurrent notice to the Company, the Designator may change or revoke the designation of any Person as a Designated Management Optionee and/or the designation of the number of Shares to be purchased, at any time prior to exercise of the designated option for any reason or for no reason. In the event one or more Designated Management Optionees are granted an option to purchase Shares pursuant to Article III, and the Shares as to which such option is exercisable are not Vested Shares in the hands of the Participant (or his or her Permitted Transferees) whose Shares are subject to purchase or sale under Article III, the Designator may, as part of the designation of the identity of the Designated Management Optionee(s), designate that all or any portion of such Shares shall be Vested Shares in the hands of the Designated Management Optionee(s); (v) "Designator" shall mean the person or the committee of three Management Shareholders, as set forth below and as the case may be, which has, among other powers, the power to designate the Designated Management Optionees. Prior to the occurrence of an Event (as defined below) for all purposes other than designating (and in connection with the designation of) Designated Management Optionees, the Designator shall be Brennan. At all times for purposes of designating (and in connection with the designation of) Designated Management Optionees, and from and after the occurrence of an Event for all purposes (including, without limitation, designating (and in connection with the designation of) Designated Management Optionees), the Designator shall be such committee of three Management Shareholders (the "Committee"). The Committee shall, except as provided below, be comprised of Brennan, Edwin G. Pohlmann ("Pohlmann") and Myron Lieberman ("Lieberman"). Prior to the occurrence of an Event, if any member of the Committee shall resign from the Committee or cease to be Qualified Management Shareholder (as defined below), then such person shall cease to be a member of the Committee and the remaining members of the Committee shall as soon as practicable appoint a Qualified Management Shareholder as a member of the Committee and thereby fill the vacancy on the Committee so created. From and after the occurrence of an Event, the Committee shall be comprised of Pohlmann, Daniel H. Levy ("Levy") and Lieberman (each of Pohlmann, Levy and Lieberman being a "Continuing Member" and collectively being the "Continuing Members") so long as each is a Qualified Management Shareholder; provided, however, that at any time from and after the occurrence of an Event (i) if one, but only one, Continuing Member has resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee shall be comprised of the two remaining Continuing Members who have not resigned from the Committee and are Qualified Management Shareholders and the Largest Management Shareholder (as defined below) (but the Second Largest Management Shareholder (as defined below) if the Largest Management Shareholder is one of such remaining Continuing Members, but the Third Largest Management Shareholder (as defined below), if both the Largest Management Shareholder and the Second Largest Management Shareholder are such remaining Continuing Members), (ii) if each of two, but only two, of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, then the Committee shall be comprised of the remaining Continuing Member who has not resigned from the Committee and is a Qualified Management Shareholder, the Largest Management Shareholder and the Second Largest Management Shareholder (but the Second Largest Management Shareholder and the Third Largest 4 Management Shareholder if the Largest Management Shareholder is such Continuing Member, but the Largest Management Shareholder and the Third Largest Management Shareholder if the Second Largest Management Shareholder is such Continuing Member), and (iii) if each of the Continuing Members has either resigned from the Committee or ceased to be a Qualified Management Shareholder, the Second Largest Management Shareholder and the Third Largest Management Shareholder. In all cases, the Committee shall act by the vote of a majority of its members; provided, however, that neither a member of the Committee nor a member of his Family may be designated as a Designated Management Optionee except upon the affirmative vote of all other members of the Committee. A "Qualified Management Shareholder" is each of Lieberman and any other person who is a Management Shareholder and employed by a member of the Ward Group. A person (including Lieberman) shall cease to be a Qualified Management Shareholder if he (i) ceases to be a Management Shareholder, (ii) dies, (iii) is adjudicated incompetent, (iv) in the case of Lieberman, ceases to be a director of the Company or (v) in the case of any Management Shareholder other than Lieberman, no member of the Ward Group employs such Management Shareholder. An "Event" means that Brennan has resigned from the Committee or ceased to be a Qualified Management Shareholder. The "Largest Management Shareholder" shall be the Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of shares of Common Stock as compared to each other Management Shareholder (other than Brennan and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve as a member of the Committee. The "Second Largest Management Shareholder" shall be the Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of shares of Common Stock as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. The "Third Largest Management Shareholder" shall be the Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) who, from time to time, is employed by a member of the Ward Group and is the owner of the largest number of shares of Common Stock as compared to each other Management Shareholder (other than Brennan, the Largest Management Shareholder, the Second Largest Management Shareholder and any Management Shareholder who is not willing or able to serve on the Committee) and who is willing and able to serve on the Committee. 5 For the purposes of the foregoing provisions of this paragraph (v), a Management Shareholder shall be deemed to own all shares of Common Stock owned by his Permitted Transferees (as defined in the Management Stockholders Agreement). In the event that two or more persons own the same number of shares of Common Stock so that each, in the absence of the other (or others, as the case may be) would be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder (as the case may be), then the remaining member (or members, as the case may be) of the Committee from time to time shall determine which of such person or persons shall be deemed to be the Largest Management Shareholder, the Second Largest Management Shareholder or the Third Largest Management Shareholder, as the case may be. (w) "Escrow Agent" shall have the meaning set forth in Section 3.11; (x) "Fair Market Value per Share" shall have the meaning set forth in Section 3.8; (y) "Family" shall mean a spouse or descendant or ancestor of a Participant, or a spouse of a descendant or ancestor of a Participant, or a trustee of a trust or custodian of a custodianship primarily for the benefit of one or more of the foregoing and/or a Participant; (z) "First Period" shall have the meaning set forth in Section 2.3(c); (aa) "GE Capital" shall mean General Electric Capital Corporation, a New York corporation; (bb) "GE Capital Affiliate" shall mean any entity which, at the time of the applicable determination, GE Capital controls, which controls GE Capital, or which is under common control with GE Capital, but does not include the Ward Group or any member thereof. For the purposes of the preceding sentence, "control" means the power, direct or indirect, to direct or cause the direction of the management and policies of a Person through voting securities, contract or otherwise. Without limiting the generality of the foregoing, as of the date hereof, Kidder, Peabody Group Inc. is a GE Capital Affiliate; (cc) "Limitations" shall have the meaning set forth in Section 4.2; (dd) "Management Shareholder" shall mean any Person who, in contemplation of that Person's acquisition of shares of Common Stock executed or executes a counterpart of, or joined in or joins in and agreed or agrees to be bound by, the Management Stockholders Agreement as a Type 1 Management Shareholder or a Type 2 Management Shareholder, as therein defined; (ee) "Management Stockholders Agreement" shall mean the Stockholders Agreement dated June 17, 1988 between the Company and certain of its stockholders, as amended and in effect from time to time; (ee)(A) "Non-Series 3 Outstanding Amount" shall mean the Outstanding Amount less the number of Series 3 Shares outstanding as of the date of determination; (ff) "Option" shall mean a nonqualified stock option to acquire Shares granted pursuant to the Plan; 6 (gg) "Originally Scheduled Article III Closing Date" shall have the meaning set forth in Section 4.1(b); (gg)(A) "Outstanding Amount" shall mean the number of Class A Shares of all series which are outstanding as of the date of determination; (hh) "Participant" shall mean any person who has been either granted an Award, provided a Purchase Right and/or granted an Option by the Company; (ii) "Period" shall have the meaning set forth in Section 2.3(c); (jj) "Permanent Disability" shall mean the total permanent disability of a Participant, who is an employee of the Ward Group, as determined in accordance with the published policies (in effect on the applicable date) of the Ward Group with respect to the determination of total permanent disability; (kk) "Permitted Transferee" shall mean: (i) a Person, other than a Participant, to whom Shares are Transferred pursuant to and in compliance with the provisions of Section 2.2(b); and (ii) a member of the Family of a Participant who has acquired Shares by virtue of having been designated a Designated Management Optionee by the Designator. Each reference herein to a Permitted Transferee of a particular Participant shall mean (x) a Permitted Transferee owning Shares which that Participant was the last Participant to own, and (y) a member of the Family of that Participant who has acquired Shares in a manner set forth in subparagraph (ii) above; (ll) "Person" shall mean any individual, sole proprietorship, partnership, joint venture, unincorporated organization, association, corporation, trust, institution, public benefit corporation, entity or government; (mm) "Plan" shall mean the Montgomery Ward & Co., Incorporated Stock Ownership Plan, as amended and in effect from time to time; (nn) "Post-Termination Death" shall have the meaning set forth in Section 3.3; (oo) "Preferred Stock" shall mean all shares of Senior Preferred Stock, par value $1.00 per share, of the Company and all shares of Junior Preferred Stock, par value $1.00 per share, of the Company. (pp) "Public Offering Termination Date" shall mean the date, if any, on which, as a result of the sale or issuance of shares of Common Stock pursuant to one or more registration statements under the Act and under Rule 144 (other than pursuant to the Plan or pursuant to a Registration Statement to register shares of Common Stock primarily or exclusively for Transfer (as hereinafter defined) upon exercise of options pursuant to the Management Stockholders Agreement or in connection therewith), 25% or more of the outstanding shares of voting common 7 stock of the Company consist of shares of voting common stock of the Company which have been so issued or sold; (qq) "Purchase Price" shall have the meaning set forth in Section 3.5; (rr) "Purchase Right" shall mean a nonqualified stock option to acquire Shares, identified as such and generally to be exercised during a shorter period of time than an Option granted pursuant to the terms of the Plan; (ss) "Rule 144" shall mean Rule 144, as amended, promulgated by the Commission under the Act; (tt) "Second Period" shall have the meaning set forth in Section 2.3(c); (tt)(A) "Series 1 Amount" shall mean the number twenty-five million (25,000,000); (uu) "Shareholder" shall mean each owner of Shares; (vv) "Shares" shall mean all shares of Class A Common Stock of the Company, and shall include certificates of beneficial interest issued by the Voting Trustee (as herein defined) pursuant to the Voting Trust Agreement (as herein defined); provided, however, that (and without implication that a contrary result was intended, but by way of clarification); (i) for the purpose of determining the number of Shares eligible to vote or receive distributions, there shall be no duplication as between Shares held by the Voting Trustee, on the one hand, and certificates of beneficial interest issued by the Voting Trustee, on the other hand; and (ii) where the right to vote Shares or execute consents is granted or required pursuant to the provisions of these Terms and Conditions, except as otherwise expressly provided in Section 7.13, the term "Shares" shall not include certificates of beneficial interest issued by the Voting Trustee under the Voting Trust Agreement; (ww) "Third Party Offer" shall mean a bona fide written offer to purchase Shares; (xx) "Trading Period" shall have the meaning set forth in Section 3.8(b); (yy) "Transfer" shall mean any transfer, sale, assignment, pledge, encumbrance or other disposition of Shares, or, in the case of the Company, any issuance or sale of Shares, irrespective of whether any of the foregoing are effected voluntarily or involuntarily, by operation of law or otherwise, or whether inter vivos or upon death; (zz) "Transferee" shall mean a Person who has made a Third Party Offer or a Person named in a Transfer Notice (as herein defined) to whom a Transferor (as herein defined) desires to Transfer Shares without consideration; (aaa) "Transferor" shall mean a Person who shall propose to Transfer Shares pursuant to Article II; 8 (bbb) "Transfer Notice" shall mean a written notice of a proposed Transfer; (ccc) "Valuation Date" shall mean the date on which the employment of a Participant with the Ward Group terminates for any reason whatsoever, including death or Permanent Disability; (ddd) "Vested Shares" shall mean that number of Shares owned by a Participant and his or her Permitted Transferees, as a group, equal to that amount determined, as of the date of determination ("Vesting Date") by (i) adding the aggregate number of Shares theretofore acquired by them as a group (other than from each other) which, at the time of acquisition by any member of the group were Vested Shares in the hands of the person who transferred such Shares, plus (ii) the number of Shares determined by multiplying the total number of Shares theretofore acquired by them as a group (other than from each other) not described in (i) above, including the number of Shares Awarded to them or purchased pursuant to exercise of Purchase Rights, but excluding the number of Shares acquired pursuant to exercise of Options, by the "Percentage of Vesting" (as herein defined) applicable to each of such Shares in effect on the Vesting Date, plus (iii) the lesser of (x) the number of Shares determined by multiplying the total number of Shares purchased or subject to purchase by them under outstanding or previously exercised Options (whether or not exercisable) by the "Percentage of Vesting" applicable to each Share so purchased or subject to purchase pursuant to an Option on the Vesting Date, and (y) the number of Shares theretofore acquired by them pursuant to exercise of Options, and (iv) subtracting from such sum the aggregate number of Vested Shares theretofore disposed of by them, as a group (other than to or among each other). For purposes hereof, the "Percentage of Vesting" shall be the following percentage: in the event of a Participant's death or Permanent Disability while employed with the Ward Group, 100%; in the event a Participant's employment with the Ward Group has been terminated for Cause, 0%; and generally in all other cases, if the Vesting Date is before the first anniversary of the Vesting Period Commencement Date (as herein defined), 0%; on or after the first anniversary and before the second anniversary of the Vesting Period Commencement Date, 20%; on or after the second anniversary and before the third anniversary of the Vesting Period Commencement Date, 40%; on or after the third anniversary and before the fourth anniversary of the Vesting Period Commencement Date, 60%; on or after the fourth anniversary and before the fifth anniversary of the Vesting Period Commencement Date, 80%; and on or after the fifth anniversary of the Vesting Period Commencement Date, 100%. The number of Vested Shares and Shares which are not Vested Shares owned in the aggregate by a Participant and his or her Permitted Transferees shall be allocated among them proportionately to the numbers of Shares owned by each of them. In the following instances the Vesting Date shall be the following date: (i) in the case of a Transfer of Shares pursuant to Article II (other than Section 2.2(a) or 2.2(e) thereof), the date on which a Transfer Notice is served; (ii) in the case of a Transfer of Shares pursuant to Section 2.2(a), the date of approval of the proposed Transfer by the Board of Directors; 9 (iii) in the case of a sale of Shares permitted by Section 2.2(e), the date the Participant or his or her Permitted Transferee Transferred Shares in reliance on said Section 2.2(e); (iv) in the case of a purchase of Shares pursuant to Article III, the date of termination of the Participant's employment with the Ward Group for any reason whatsoever; Notwithstanding the foregoing provisions of this paragraph (ddd): (v) in the case of a purchase of Shares pursuant to Article III from a Participant whose Percentage of Vesting, in accordance with the foregoing, is less than 100%, the Board of Directors, in its discretion, may increase the Percentage of Vesting as determined in accordance with the foregoing, but not in excess of 100%; (vi) in the case of termination of employment of a Participant with the Ward Group (other than for Cause), where not all Shares owned by that Participant and his or her Permitted Transferees were purchased in accordance with Section 3.1, on the Article III Closing Date those Shares not so purchased which were not Vested Shares as of the date of termination of employment shall become Vested Shares for all purposes of these Terms and Conditions other than Section 3.3, and for the purposes of Section 3.3 said Shares shall not thereafter become Vested Shares; (vii) in connection with any issuance or sale of Shares by the Company, the Company may designate all or any portion of such Shares as Vested Shares; (viii) at any time and from time to time, after June 23, 1988, upon written notice delivered to the Company, the Designator may increase the Percentage of Vesting otherwise applicable to a Participant and his or her Permitted Transferees, but not in excess of 100%; (ix) on the Public Offering Termination Date, except for the purposes of Section 3.3, all Shares which are not then Vested Shares shall become Vested Shares; (eee) "Vesting Period Commencement Date" shall mean (i) in the case of an Award, the date of the grant of the Award; (ii) in the case of a Purchase Right, the date of exercise of the Purchase Right; and (iii) in the case of an Option, the date of grant of the Option; (fff) "Voting Trust Agreement" shall mean that certain Voting Trust Agreement, dated as of June 21, 1988, among Brennan and the other individuals who are parties thereto; (ggg) "Voting Trust Certificates" shall mean certificates of beneficial interest issued by the Voting Trustee in exchange for Shares deposited in the Voting Trust; (hhh) "Voting Trustee" shall mean the Person serving as voting trustee under the Voting Trust Agreement; 10 (iii) "Ward" shall mean Montgomery Ward & Co., Incorporated, an Illinois corporation; (jjj) "Ward Group" shall mean the Company, Ward and its subsidiaries. 1.3 Transferability of Certain Shares. Shares issued by the Company pursuant to a stock dividend, stock split, reclassification, or like action, or pursuant to the exercise of a right granted by the Company to all its stockholders to purchase shares of Common Stock on a proportionate basis, shall be Transferred only, and for all purposes be treated, in the same manner as, and be subject to the same options with respect to, the Shares which were split or reclassified or with respect to which a stock dividend was paid or rights to purchase shares on a proportionate basis were granted. In the event of a merger of the Company where these Terms and Conditions do not terminate pursuant to Section 7.2(c), shares of stock and/or securities convertible into shares of stock issued in exchange for Shares shall thereafter be deemed to be Shares which are subject to the terms of these Terms and Conditions. 1.4 Duration of Certain Portions of Article II and Certain Portions of Article III. From and after the Public Offering Termination Date: (a) the provisions of Article II shall cease to be in effect as to any Participant; and (b) the provisions of Section 3.2(a) shall terminate, and all references in Sections 3.2(b) and (c) to the 90-day period referred to in Section 3.2(a) shall be eliminated from said Sections. 1.5 Duration of Certain Portions of Article V. Anything herein to the contrary notwithstanding, the provisions of Article V hereof, to the extent they constitute an agreement with respect to the manner in which Shares shall be voted, shall be in effect only until June 17, 1998, unless sooner terminated pursuant to other provisions contained herein. 1.6 Applicability of Terms and Conditions; Continuation of Terms and Conditions. Unless otherwise required by the terms of a specific Award or grant of a Purchase Right or Option, these Terms and Conditions shall not apply to a Participant, or to any Person acquiring Shares pursuant to the provisions hereof, who is a Management Shareholder, but, rather, all Shares issued to or acquired by a Participant who is a Management Shareholder shall be governed by the terms and provisions of the Management Stockholders Agreement. Except as contemplated herein, Shares shall not be Transferred by any Participant or any of his or her Permitted Transferees to any Person who is not a signatory to these Terms and Conditions or bound by the provisions of the Management Stockholders Agreement unless that Person shall have executed and delivered such documents as are deemed reasonably necessary by the Company, in consultation with its counsel, to evidence such Person's acceptance of, and agreement to be bound by, these Terms and Conditions. 1.7 Withholding. Each Participant shall pay, or make arrangements to pay, all federal, state and local income taxes which may be assessed upon such Participant in connection with his or her ownership of Shares, including, without limitation, taxes which may be imposed in connection with the lapse or release of any restrictions set forth herein with respect to the Shares. In any case in which any member of the Ward Group is legally required to withhold such taxes, such payment shall be made on or before the date such withholding is required. In the event any such payment is not made when due and any member of the Ward Group is legally required to withhold such taxes, then, to the extent 11 permitted by law, the Company shall have the right to do any of the following in its sole discretion: (i) direct the Voting Trustee to sell such number of Shares subject to the Voting Trust Agreement which are beneficially owned by the Participant as may be necessary in order that the net proceeds of sale will equal the member of the Ward Group's withholding obligation (with such Shares remaining subject to the Voting Trust Agreement), and pay such net proceeds to such member of the Ward Group; (ii) deduct the amount required to be withheld from funds otherwise due the Participant by the Ward Group (including, without limitation, salaries and proceeds of the sale of Shares sold to the Company pursuant to the provisions of these Terms and Conditions), and pay the amount so deducted to such member of the Ward Group; or (iii) pursue any other legal or equitable right or remedy. 1.8 Shortening or Lengthening of Option Periods. Whenever in Article II or Article III the Company or a Shareholder is given an option to purchase or sell Shares which is exercisable during a given period of time, if the Company or that Shareholder chooses not to exercise that option, the Company or that Shareholder may deliver written notice of that fact to the Company (in the case where a Shareholder is relinquishing an option) and the Designator. In such event, the applicable option period shall be deemed to have ended with respect to the Company or such Shareholder (as the case may be) on the date on which such notice is delivered. Any period during which an option to purchase is exercisable may be extended by agreement of the party subject thereto. In such event, options to purchase which are subsequent to the option with respect to which the period is extended shall become exercisable on the date upon which they would have been exercisable, unless otherwise agreed by the holders of such options, and shall be extended to the same extent as that the prior options are extended from time to time. 1.9 Execution of Voting Trust Agreement. At any time in which the Voting Trust Agreement is in effect, as a condition to any Award, grant of a Purchase Right, or exercise of an Option, the Participant shall be required to execute a counterpart of the Voting Trust Agreement, transfer the Shares to be acquired to the Voting Trustee in exchange for certificates of beneficial interest representing a like number of Shares, and take such other steps as may be necessary in order that the Voting Trustee shall have the sole voting power with respect to the Shares acquired by the Participant. ARTICLE II Voluntary Transfers of Shares 2.1 General Effect of Terms and Conditions. Unless a Transfer of Shares by a Participant or his or her Permitted Transferees or by a Transferee is made in accordance with the provisions hereof, it shall not be valid or have any force or effect. 2.2 Certain Permitted Transfers of Shares. Anything contained herein to the contrary notwithstanding, Shares may be Transferred: (a) with the prior approval of the Board of Directors, by the affirmative vote of not less than 2/3 of its members, either subject to these Terms and Conditions or otherwise as the Board of Directors shall determine; (b) (i) by Participant to any member of his or her Family; 12 (ii) by a member of the Family of a Participant to any other member of the Family of that Participant or to that Participant; (iii) to the personal representative of a Participant or Permitted Transferee who is deceased or adjudicated incompetent; (iv) subject to the provisions of Section 3.2 or 3.3 (as the case may be), by the personal representative of a Participant or Permitted Transferee who is deceased or adjudicated incompetent to any member of said Participant's Family; and (v) upon termination of a trust or custodianship which is a Permitted Transferee, by the trustee of such trust or custodian of such custodianship to the person or persons who, in accordance with the provisions of said trust or custodianship, are entitled to receive the Shares held in trust or custody; (c) pursuant to Articles III or IV; (d) by a Participant or by any of his or her Permitted Transferees to Brennan; and (e) provided that such Shares are not subject to the Voting Trust Agreement, and provided that Section 2.3 has been complied with as if the Transfer was being made pursuant to Sections 2.4 through 2.10, both inclusive, and, if there was not an effective registration statement under the Act covering the issuance of the Shares to the Participant by the Company, pursuant to Rule 144. Regardless of the party to whom a Transfer of Shares is made pursuant to this Section 2.2, the Shares so Transferred shall thereafter continue to be subject to the terms, provisions and conditions of these Terms and Conditions; provided, however, that (x) if the Board of Directors has so determined, Shares Transferred pursuant to paragraph (a) hereof, and (y) Shares Transferred pursuant to paragraph (e) hereof shall not be subject to the terms, provisions and conditions of these Terms and Conditions. 2.3 Certain Prohibited Transfers. Without the prior written approval of the Board of Directors the following Transfers of Shares are prohibited: (a) no Participant or Permitted Transferee may Transfer Shares prior to the first to occur of (i) the third anniversary of the applicable Vesting Period Commencement Date and (ii) the Public Offering Termination Date; (b) no Participant or Permitted Transferee may Transfer Shares which are not Vested Shares; (c) during the 12-month period ("First Period") beginning on the first to occur of the third anniversary of the applicable Vesting Period Commencement Date and the Public Offering Termination Date, and during the 12- month period immediately following the First Period (the "Second Period," the First Period and the Second Period being referred to generally as "Period"), neither a Participant nor any Permitted Transferee may Transfer Shares to the extent such Transfer would result in the Transfer of more than 33 1/3% for the First Period and 13 50% for the Second Period of the Vested Shares collectively owned by the Participant and all of his or her Permitted Transferees at the beginning of the applicable Period; and (d) no Transferor may Transfer Shares unless he or she has received a Third Party Offer. 2.4 Notice of Transfer of Shares. Even though the requirements of Section 2.3 shall have been met, no Shares shall be Transferred by a Transferor, except as may be required or permitted pursuant to the provisions of Section 2.2, Article III or Article IV, unless the Transferor first serves a Transfer Notice upon the Company, the Designator and GE Capital and complies with the remaining provisions of this Article II. 2.5 Form of Transfer Notice. Each Transfer Notice shall specify: (a) the number of Shares which the Transferor proposes to Transfer and the consideration per Share to be received for said Transfer; (b) the name, and business and residence addresses of the Transferee(s); (c) all of the terms and conditions, including the terms and conditions of payment, upon which the Transferor proposes to Transfer said Shares; and (d) the address of the Transferor to which notices of the exercise of the options herein provided shall be sent. The Transferor shall attach to the Transfer Notice a true and correct copy of the Third Party Offer, and the information to be contained in the Transfer Notice required by paragraphs (a) and (c) above shall be the corresponding information as set forth in the Third Party Offer. 2.6 Approval of Board of Directors. The options set forth in Section 2.7 shall be exercisable, and a Transfer of Shares to a Transferee can be made, only if the Board of Directors, within the 10-day period next following the date of service of the Transfer Notice, shall approve the Transferee as a prospective holder of Shares. Subject to the following sentence, the Board of Directors shall not unreasonably withhold its approval of any Transferee, and shall not withhold its approval if the Transferee is then a Management Shareholder, GE Capital or a GE Capital Affiliate. However, the Board of Directors may, in its sole discretion, withhold its approval of any Transferee which is then engaged in a Competing Business. The Board of Directors shall be conclusively deemed to have approved the Transferee unless, prior to the expiration of the 10-day period, it shall notify the Transferor in writing of its disapproval. 2.7 Options. Upon the service of a Transfer Notice, and provided that the Transferee has been approved by the Board of Directors as set forth in Section 2.6, options to purchase the Shares described therein shall be created, and may be exercised, as follows: (a) the service of a Transfer Notice by a Transferor shall create: (i) options in each of the Designated Management Optionees (exercisable by service of written notice upon the Transferor, the Designator, GE Capital and the 14 Company within the 45-day period next following the date of service of the Transfer Notice) to purchase all or any portion of the Shares described in the Transfer Notice, at the price and on the terms therein contained; (ii) an option in the Company (exercisable by service of written notice upon the Transferor, the Designator and GE Capital within the 15-day period next following the date of expiration of the 45-day period described in subparagraph (i) of this paragraph (a)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees, at the price and on the terms therein contained; and (iii) an option in GE Capital (exercisable by service of written notice upon the Transferor, the Designator and the Company within the 15-day period next following the date of expiration of the 15-day period described in subparagraph (ii) of this paragraph (a)) to purchase all or any portion of the Shares described in the Transfer Notice which were not purchased by the Designated Management Optionees and the Company, at the price and on the terms therein contained; (b) the service of a Transfer Notice by a Permitted Transferee shall create an option in his or her Participant to own the Shares sought to be Transferred (exercisable by service of written notice upon the Transferor, the Designator, the Company and GE Capital within the 30-day period next following the date of service of the Transfer Notice) to purchase all or any portion of the Shares described therein, at the price and on the terms therein contained. If said Participant does not exercise the foregoing option with respect to all Shares described in the Transfer Notice, the optionees described in paragraph (a) above shall have the options to purchase the Shares with respect to which said Participant has not exercised his or her foregoing option that would have been created if said Participant had been the person desiring to Transfer the Shares and if the Transfer Notice had been served on the last day of the 30-day period during which said Participant could have exercised his or her option pursuant to this paragraph (b). 2.8 Transfer if Options Not Exercised. If none of the options provided in Section 2.7 are exercised, or if such options are exercised only in part, or if such options are treated, pursuant to Section 2.9, as if not exercised, then, during a period of 60 days beginning on the day following the date of expiration of the last applicable option period, the Transferor may Transfer all, but not less than all, Shares sought to be Transferred as to which such options were not exercised (or treated, pursuant to Section 2.9, as if not exercised), to the Transferee(s), at the price specified in the Transfer Notice and on terms and conditions not less favorable to the Transferor than those specified in the Transfer Notice. In the event said Shares are not so Transferred, they shall remain subject in all respects to the terms hereof and may not thereafter be Transferred except in compliance with all terms, conditions and provisions hereof. 2.9 Exercise of Options for Less than All of the Shares. If options exercised pursuant to Section 2.7 call for the purchase of less than all of the Shares sought to be Transferred, then, at the election of the Transferor (exercised by the service of written notice of such election upon the Company and each Person exercising an option to purchase Shares within 10 days next following the expiration of the last period in which such options may be exercised), the exercise of all or any such options shall be deemed null and void and treated, for purposes hereof, as if said options had not been exercised. 15 2.10 Closing of Exercise of Options. To the extent Shares are to be purchased by Designated Management Optionees, the Company or GE Capital by reason of their exercises of options under Section 2.7, the closing of all such purchases shall take place, at the principal offices of the Company, on the 30th day next following the date on which the last applicable option period expired. 2.11 Effect of Shares in the Hands of Third-Party Transferee. Shares which are Transferred, pursuant to Section 2.8, to a Transferee who is not a Participant, a Permitted Transferee or a party to the Management Stockholders Agreement, shall thereafter continue to be subject to all restrictions on Transfer and all other agreements, provisions, terms and conditions which are contained herein, and, without limiting the generality of the foregoing, the Transferee must comply with: (a) the provisions of Sections 2.4 through 2.10, both inclusive, if the Transferee shall desire to Transfer any such Shares, as if the Transferee was a Participant; and (b) the voting agreement provisions of Article V, as if the Transferee was a Participant. 2.12 Termination of GE Capital's Rights. From and after the date that GE Capital and the GE Capital Affiliates cease to own, in the aggregate, at least 20% of the shares of Common Stock which GE Capital and the GE Capital Affiliates purchased on June 22, 1988, all rights of GE Capital under Sections 2.7(a) (iii) and (b) of this Article II shall terminate. ARTICLE III Purchases of Shares Upon Termination of Employment 3.1 Termination of Employment of Participant. Upon the termination of a Participant's employment with the Ward Group for any reason other than death or Permanent Disability (including, without limitation, resignation or discharge for or without Cause), the Company shall forthwith notify the Designator of such termination, and: (a) each of the Designated Management Optionees shall have an option (exercisable by service of written notice upon such Participant, each of his or her Permitted Transferees, and the Designator, within the 45-day period next following the date on which the Company has notified the Designator that such Participant's employment has terminated), to purchase all or any portion of the Shares owned by such Participant and each of his or her Permitted Transferees; and (b) the Company shall have an option (exercisable by service of written notice upon such Participant, each of his or her Permitted Transferees, and the Designator, within the 30-day period next following the last day of the 45-day period referred to in paragraph (a)), to purchase all or any portion of the Shares which were not purchased by the Designated Management Optionees; and (c) each of the Designated Management Optionees shall have an additional option (exercisable by service of written notice upon such Participant, each of his or her Permitted Transferees, and the Designator, within the 105-day period next following the date on which the 16 Company has notified the Designator that such participant's employment has terminated), to purchase all or any portion of the Shares owned by such Participant and each of his or her Permitted Transferees which were purchased upon exercise of an option after termination of the Participant's employment; and (d) the Company shall have an option (exercisable by service of written notice upon such Participant, each of his or her Permitted Transferees and the Designator, within the 30-day period next following the last day of the 105-day period referred to in paragraph (c)), to purchase all or any portion of the Shares which were not purchased by the Designated Management Optionees; all in the manner, for the price and on the terms and conditions contained in Sections 3.5 through 3.11, both inclusive, of this Article III. 3.2 Death or Total Permanent Disability of a Participant. Upon the death of a Participant while such Participant is an employee of the Ward Group; or in the event the employment of a Participant with the Ward Group shall be terminated by reason of Permanent Disability: (a) the personal representative of the deceased or Permanently Disabled Participant or the Permanently Disabled Participant (as the case may be), and each Permitted Transferee of the deceased or Permanently Disabled Participant, shall each have the option (exercisable by written notice delivered to the Company and the Designator not later than 90 days after the date of death or the date of termination of the Participant's employment with the Ward Group by reason of Permanent Disability, as the case may be, of the Participant), to sell all or any portion of the Shares then owned by such respective Shareholders in accordance with paragraph (b); (b) if the options described in paragraph (a) are exercised, the Designated Management Optionees shall each have the option (exercisable by written notice delivered to the Company and each Shareholder having an option to sell Shares pursuant to paragraph (a), within the 30-day period next following the expiration of the 90-day period described in paragraph (a)) to purchase all or any portion of the Shares as to which the options to sell described in paragraph (a) were exercised, and the Company shall purchase the Shares as to which the options described in paragraph (a) to sell were exercised which the Designated Management Optionees have not elected to purchase pursuant to this paragraph (b); (c) if and to the extent the options described in paragraph (a) are not exercised, the Designated Management Optionees shall have the option (exercisable by written notice delivered to each Shareholder having an option to sell Shares to the Company pursuant to paragraph (a) and the Company within the 30-day period next following the 90-day period referred to in paragraph (a)), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not exercise their respective options to sell as set forth in paragraph (a); and (d) the Company shall have the option (exercisable by written notice to each Shareholder having an option to sell Shares to the Company pursuant to paragraph (a) within the 30-day period next following the expiration of the 30-day period referred to in paragraph (c)), to purchase from such Shareholders all or any portion of the Shares then owned by such Shareholders as to which they did not exercise their respective options to sell as set forth in 17 paragraph (a) and as to which the Designated Management Optionees did not exercise their respective options to purchase as set forth in paragraph (c); all in the manner, for the price, and on the terms and subject to the conditions contained in Sections 3.5 through 3.11, both inclusive, of this Article III. 3.3 Death of Participant Following Termination of Employment. Upon the death of a Participant following termination of the Participant's employment with the Ward Group (a "Post-Termination Death"), in the case where that Participant and his or her Permitted Transferees did not previously sell all Shares owned by them, respectively, pursuant to Section 3.1 or Section 3.2: (a) each of the Designated Management Optionees shall have an option (exercisable by service of written notice upon such Participant, each of his or her Permitted Transferees, and the Designator, within the 90-day period next following the date on which the Company has notified the Designator that such Participant has died), to purchase all or any portion of the Shares owned by such Participant and each of his or her Permitted Transferees; and (b) the Company shall have an option (exercisable by service of written notice upon such Participant's personal representative, each of such Participant's Permitted Transferees, and the Designator, within the 30-day period next following the last day of the 90-day period referred to in paragraph (a)), to purchase all or any portion of the Shares which were not purchased by the Designated Management Optionees; all in the manner, for the price and on the terms and conditions contained in Sections 3.5 through 3.11, both inclusive, of this Article III. 3.4 Notice of Death. In order to effectuate the exercise of the options set forth in Sections 3.2 and 3.3 in the event of the death of a Participant, the personal representative of the deceased Participant shall give written notice of such Participant's death to the Company within 90 days after the date of such death, regardless of whether such personal representative shall be entitled to exercise any option granted to him or her pursuant to this Article III. Forthwith following the receipt of such notice, the Company shall deliver a copy thereof to the Designator. In the event such notice is not so given by the personal representative of the deceased Participant, the period of time during which the options set forth in Sections 3.2 and 3.3 may be exercised shall be extended appropriately. 3.5 Purchase Price of Shares. The aggregate purchase price ("Purchase Price") of Shares to be purchased pursuant to Sections 3.1, 3.2, or 3.3, shall be the following: (a) if the product of the Fair Market Value per Share (as defined below) multiplied by the aggregate number of Shares to be purchased is equal to or less than the aggregate Acquisition Price of the Shares to be purchased, then the Purchase Price shall be the product of the Fair Market Value per Share, multiplied by the aggregate number of Shares to be purchased; (b) if paragraph (a) is not applicable, subject to paragraph (c) below, the Purchase Price shall be equal to the sum of (x) the product of the Fair Market Value per Share multiplied by the number of Vested Shares to be purchased, plus (y) the product of the Acquisition Price multiplied by the number of Shares which are not Vested Shares to be purchased; 18 (c) where options are exercised pursuant to Section 3.1 or 3.3 for less than all of the Shares owned by a Participant and his or her Permitted Transferees, in determining the Purchase Price in accordance with paragraph (a) or (b), the Shares which are not Vested Shares shall be deemed to have been purchased or sold first; and (d) for the sole purpose of computing the Purchase Price in connection with a purchase of Shares pursuant to Section 3.3, in computing that portion of the Purchase Price which is allocable to Shares which are not Vested Shares, the Acquisition Price of each of the Shares which are not Vested Shares shall be increased by a simple interest factor of 8% per annum calculated from the Valuation Date to the Article III Closing Date, but the Acquisition Price, as so increased, shall not exceed the Fair Market Value per Share. 3.6 Manner of Payment. Subject to the provisions of Article IV, the Purchase Price shall be paid in the following manner: (a) except as otherwise provided in paragraph (c), an amount equal to 25% of the Purchase Price of all Shares shall be paid in cash on the Article III Closing Date; (b) except as otherwise provided in paragraph (c), the balance of the Purchase Price shall be paid in three equal annual installments on the first through third anniversaries, both inclusive, of the Article III Closing Date. The principal amount of the balance of the Purchase Price remaining from time to time unpaid shall bear interest, payable on the same dates as each installment of principal, at a rate per annum equal to the lowest rate of interest which will not result in any portion of the Purchase Price being deemed to be unstated interest or original issue discount under the provisions of the Internal Revenue Code of 1986, as amended. If said provisions are inapplicable for any reason, the interest rate shall be 8% per annum; (c) notwithstanding the preceding provisions of this Section 3.6, in the event of a purchase of Shares following the voluntary termination of employment of a Participant with the Ward Group (other than by reason of normal retirement in accordance with such entity's retirement policies), or the termination of employment of such Participant with the Ward Group for Cause, the amount which shall be paid on the Article III Closing Date shall equal 16% of the Purchase Price, and the balance of the Purchase Price shall be paid in five equal annual installments on the first through fifth anniversaries, both inclusive, of the Article III Closing Date, plus interest, payable on the same dates as each installment of principal, at the rate determined pursuant to paragraph (b); and (d) the Purchase Price shall be payable by the Designated Management Optionees and the Company in proportion to their respective purchases of Shares pursuant to this Article III. 3.7 Notes and Security. The portion of the Purchase Price which has not been paid in cash on the Article III Closing Date shall be evidenced and secured as follows: (a) the portion of the Purchase Price which is not paid on the Article III Closing Date shall be evidenced by a non-negotiable secured promissory installment note(s) made by the Company and/or the Designated Management Optionees purchasing Shares (as the case may be). Each such note or notes shall be in a commercially reasonable form of promissory note given to 19 evidence an installment indebtedness, providing for payment of the unpaid balance of the Purchase Price, and interest thereon, all as provided in Section 3.6. Each such promissory installment note shall provide for acceleration in the event of non-payment after a reasonable grace period, and that it may be prepaid at any time or from time to time, in whole or in part, without premium, penalty or notice. All prepayments shall be applied against installments coming due in the inverse order of their maturity. If there is more than one seller of such Shares, a separate note shall be issued to each seller of such Shares. Each promissory note which is made by the Company shall provide that the obligations thereunder are subordinated to the extent provided in, and are subject to the provisions of, Article IV. Each note shall provide that a default under any note made by the party issuing it to a Participant or his or her Permitted Transferees pursuant to this Article III shall be a default under all notes made by that party to such Participant and his or her Permitted Transferees pursuant to this Article III; and (b) each note shall be secured, at the option of the purchaser of the Shares, by either (x) a pledge, meeting the requirements of the Illinois Uniform Commercial Code, of a number of the Shares purchased which would have an aggregate purchase price at the time of the pledge (determined in the manner provided in Section 3.5 and in the following sentences) equal to the original principal amount of such note, or (y) a standby letter of credit reasonably satisfactory to the Shareholder whose Shares are being sold. If Shares are to be pledged, for the purposes of determining the type and number thereof, on the Article III Closing Date the Company and the Designated Management Optionees shall be deemed to have made payment in full for a type (Vested Shares or Shares which are not Vested Shares, as the case may be) and number of Shares which would have had an aggregate purchase price (determined as provided herein) equal to the amount so paid, and the Shares which are so deemed to have been paid for in full shall not be subject to the pledge, and only the balance of the Shares shall be subject to the pledge. In determining the value of the Shares which are deemed to have been paid for in full on the Article III Closing Date in accordance with the two preceding sentences, Shares which are not Vested Shares shall first be deemed to have been paid for in full, until all of such Shares have been deemed to have been paid for in full. If Shares are to be pledged, at the option of the pledgor, the Shares to be pledged shall be held by an escrowee reasonably satisfactory to the pledgor, pursuant to an Escrow Agreement containing terms and provisions which are reasonably satisfactory to the pledgor. 3.8 Fair Market Value. The Fair Market Value per Share of Shares purchased pursuant to this Article III shall be determined as follows: (a) unless a public market for the Shares exists, the Fair Market Value per Share of each of the Shares shall be based upon the fair market value of the consolidated common equity of the Company for the fiscal year in which the termination of the employment of a Participant (the "Valuation Date") occurs (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the fiscal year in which the Article III Closing Date occurs (in the case of a purchase of Shares pursuant to Section 3.3), adjusted as provided herein. The Valuation Date (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the Article III Closing Date (in the case of a purchase of Shares pursuant to Section 3.3) is referred to herein as the "Applicable Date". Subject to the following provisions, the fair market value of the consolidated common equity of the Company shall be determined annually by the Board of Directors, as of the first day of the then-current fiscal year of the Company, in its reasonable discretion and in good faith, as soon after the commencement of each fiscal year of the Company as possible. In 20 the event the fair market value of the consolidated common equity of the Company, as so determined, would exceed 150% of the consolidated common equity of the Company (determined in accordance with the generally accepted accounting principles applied by the Company) as of the first day of the fiscal year for which the determination is to be made, the affirmative vote of not less than 2/3 of the members of the Board of Directors shall be required in order to determine the amount of the excess. The Board of Directors may in its discretion retain an independent investment banker to make recommendations to the Board of Directors as to the fair market value of the consolidated common equity of the Company. Each such determination shall be effective as of the first day of the then-current fiscal year, and remain in effect with respect to all Applicable Dates occurring during that fiscal year provided, however, that the fair market value of the common equity as so determined by the Board of Directors shall be adjusted by adding: (i) an amount equal to the Fair Market Value at the date of grant for all outstanding and unexpired Options and Purchase Rights and other options or rights to acquire shares of common stock during the period commencing on the first day of the fiscal year in which the Applicable Date occurs and ending on the Article III Closing Date (the "Adjustment Period"); (ii) the amount of cash and other consideration (including any difference between the Fair Market Value at the date of grant and the exercise price) received or receivable by the Company during the Adjustment Period on account of the exercise of any Options, Purchase Rights, or other options or rights to acquire shares of common stock; (iii) the aggregate consideration received by the Company for shares of common stock issued during the Adjustment Period and not accounted for in either (i) or (ii) above; and by subtracting: (iv) the aggregate amount of dividends paid or payable by the Company on its common stock during the Adjustment Period; and (v) the aggregate amount paid by the Company to redeem, repurchase or otherwise acquire for consideration shares of its common stock during the Adjustment Period; and the said fair market value of the consolidated common equity of the Company, as so adjusted, shall be the fair market value of the consolidated common equity of the Company. The foregoing adjustments shall be made by the Company's chief financial officer, acting reasonably and in good faith and in accordance with the provisions of this Section 3.8. For the first fiscal year of the Company, the parties agree that the fair market value of the consolidated common equity of the Company as of the first day of such first fiscal year shall be $10,000,000. Once the fair market value of the consolidated common equity of the Company has been determined as provided in the foregoing provisions of this paragraph (a), the Fair Market Value per Share of each of the Shares to be purchased pursuant to this Article III shall be determined as follows: 21 (vi) the Fair Market Value per Share of each of the Class A Shares shall be the amount determined as follows: a. First, at any time when the Outstanding Amount as of the date of determination does not exceed the Series 1 Amount, the fair market value of the consolidated common equity of the Company shall be multiplied by a fraction the numerator of which is the Class A Amount and the denominator of which is the sum of the Class A Amount plus the number of outstanding Class B Shares on the day immediately preceding the Article III Closing Date; or b. at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount, but the Non-Series 3 Outstanding Amount does not exceed the Series 1 Amount, the fair market value of the consolidated common equity of the Company shall be multiplied by a fraction the numerator of which is the product of the amount which would be determined if the immediately preceding Section 3.8(a)(vi)a. were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by a fraction the numerator of which is the Outstanding Amount plus the number of Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan on the day immediately preceding the Article III Closing Date and the denominator of which is the sum of the Series 1 Amount plus fifty percent (50.0%) of the excess of the Outstanding Amount over the Series 1 Amount; plus eighty-one point five percent (81.5%) of the number of Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan; or c. at any time when the Outstanding Amount as of the date of determination exceeds the Series 1 Amount (and Section 3.8(a)(vi)b. is not applicable), the fair market value of the consolidated common equity of the Company shall be multiplied by a fraction the numerator of which is the product of (a) the amount which would be determined if Section 3.8(a)(vi)a. were applicable and the Class A Amount were equal to the Series 1 Amount multiplied by (b) a fraction the numerator of which is the Outstanding Amount plus the number of Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan on the day immediately preceding the Article III Closing Date; and the denominator of which is the sum of the Series 1 Amount plus eighty-one point five percent (81.5%) of the sum of (i) the Non-Series 3 Amount plus (ii) the number of Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan, plus (iii) fifty percent (50.0%) of the number of Series 3 shares outstanding as of the date of such determination; and d. Second, the amount determined pursuant to subparagraph a., b. or c., as applicable, shall be divided by the aggregate number of Class A Shares (without distinction as to series) on the day immediately preceding the Article III Closing Date, with Shares which are subject to purchase pursuant to options granted under the Employee Stock Option Plan being treated, for the purposes of this subparagraph d., as being outstanding Shares; 22 provided, however, that no adjustment to the Fair Market Value per Class A Share as calculated as of the first day of the then-current fiscal year shall be required unless such adjustment would result in an increase or a decrease of at least 1% from the amount as so determined as of the beginning of the then-current fiscal year; (vii) the Fair Market Value per Share of each of the Class B Shares shall be the amount determined by (x) subtracting from the fair market value of the consolidated common equity of the Company the aggregate Fair Market Value per Share of all of the Class A Shares of all series, as determined pursuant to subparagraph (vi), and (y) dividing the resulting number by the total number of Class B Shares which are outstanding as of the day immediately preceding the Article III Closing Date. In the event the Article III Closing Date occurs prior to the date on which the appropriate fair market value of the consolidated common equity of the Company has been determined, the Purchase Price shall initially be determined on the basis of the most recent determination of the fair market value of the consolidated common equity of the Company and shall thereafter be adjusted as soon as the fair market value of the consolidated common equity of the Company for the current fiscal year has been determined. If necessary in order to accomplish any such adjustment, the parties shall immediately substitute new notes and/or exchange cash payments as soon as practicable after the amount of such adjustment is determined, so that the parties are placed in the same positions in which they would have been if the appropriate fair market value of the consolidated common equity of the Company had been known on the Article III Closing Date; (b) if a public market for the Shares exists, the Fair Market Value per Share shall be the Average Closing Price of the Shares during the period ("Trading Period") consisting of the ten trading days ending on the day immediately preceding the Valuation Date (in the case of a purchase of Shares pursuant to Section 3.1 or 3.2) or the date on which the first option arising under Section 3.3 was exercised (in the case of a purchase of Shares pursuant to Section 3.3). For the purposes of the preceding sentence: (i) if the Shares are listed on any national securities exchange or traded in the over-the-counter market and included in the NASDAQ National Market System, the Average Closing Price shall be the arithmetic mean of the last sale prices of the Shares on each day of the Trading Period on the national securities exchange where the Shares are principally traded if the Shares are listed for trading on such exchange, or in the over-the-counter market as reported by NASDAQ if the Shares are included in the National Market System; and (ii) if the Shares are traded over-the-counter but are not included in the NASDAQ National Market System, the Average Closing Price shall be the arithmetic mean of the average of the closing bid and asked quotations on each day of the Trading Period. 3.9 Closing. Subject to the remainder of this Section 3.9 and to Section 4.1, any purchase of Shares pursuant to this Article III shall be consummated ("Article III Closing") at the Company's principal office at 10:00 a.m., prevailing business time, on the 30th day next following the last day on which the last option to purchase or sell such Shares which is granted pursuant to this Article III is 23 exercisable ("Article III Closing Date"), or on such earlier day as designated by the purchaser(s) in the sole discretion of the purchaser(s) upon not less than three days prior notice to the Participant or his or her personal representative, as the case may be, and to the Participant's Permitted Transferees. If said date is a Saturday, Sunday or legal holiday, the Article III Closing shall occur at the same time and place on the next succeeding business day. At the Article III Closing, each person selling Shares shall deliver certificates representing the Shares being purchased, duly endorsed, and each shall furnish such other evidence, including applicable inheritance and estate tax waivers and releases, as may reasonably be necessary to effect the Transfers of Shares. The Company and/or the Designated Management Optionees purchasing Shares shall make the payments, deliver the notes, and effect the pledges, which are set forth in Sections 3.6 and 3.7. 3.10 Priorities. In the event options to purchase Shares owned by a Participant or a Permitted Transferee shall arise under both Article II and Article III, as between the provisions of Article II, on the one hand, and Article III, on the other hand, if on the date on which an option to purchase or sell Shares arises under Article III, any option under Article II has not been exercised, or, if exercised, the purchase to be made pursuant to said exercise has not been closed, the priority of such Articles shall be determined by the Designator, but if the Designator fails to make any such determination by written notice delivered to the Company within 30 days next following the date on which the option or obligation under Article III arose, Article III shall have priority. 3.11 Failure to Deliver Shares. In the event the Company or any of the Designated Management Optionees exercise one or more options to purchase Shares pursuant to this Article III, or the Company becomes obligated to purchase Shares pursuant to this Article III, and in the event a Participant or Permitted Transferee whose Shares are to be purchased pursuant to this Article III fails to deliver them on the Article III Closing Date, the Company and/or the Designated Management Optionees purchasing Shares may elect to deposit the cash and promissory note(s) representing the Purchase Price with the Company's general counsel ("Escrow Agent"). In the event the Company and/or said Designated Management Optionees do so, the Shares shall be deemed for all purposes (including the right to vote and receive payment of dividends) to have been Transferred to the purchasers thereof, the Company or the Voting Trustee (as the case may be) shall issue new certificates representing the Shares to the purchasers thereof, and the certificates registered in the name of the Shareholders obligated to sell them (or the voting trust certificates, as the case may be) shall be deemed to have been cancelled and to represent solely a right to receive payment of the Purchase Price, with interest (if any) earned thereon, from the escrow. If the proceeds of sale have not been claimed by the former Shareholders whose Shares were purchased pursuant to this Article III prior to the third anniversary of the Article III Closing Date, the escrow deposits, and all interest (if any) earned thereon, shall be returned to the respective depositors, and the former Shareholders whose Shares were purchased shall look solely to the purchasers for payment of the Purchase Price. The Escrow Agent shall not be liable for any action or inaction taken by him in good faith, and shall have no liability whatsoever for failure to earn interest (or with respect to the amount of interest earned) on the escrow deposits. 3.12 Resale of Shares. The Company may resell or redistribute by way of Award, Purchase Right or Option or in any other manner pursuant to the Plan or the Management Stockholders Agreement, any Shares repurchased by the Company pursuant to this Article III or Article II. At any time in which the Voting Trust Agreement is in effect, the party to whom the Shares are reissued shall, if not already a party to the Voting Trust Agreement, join in and become a party thereto, the Company shall, on behalf of said party, issue Shares to the Voting Trustee for the benefit of said party, and the Voting Trustee shall issue to said party Voting Trust Certificates constituting an equal number of Shares. 24 3.13 Modification of Options. Notwithstanding anything to the contrary contained herein, with respect to any options created upon termination of employment pursuant to Section 3.1 or 3.2 hereof, for all purposes of this Agreement, with respect to any Person subject to Section 16 of the Securities Exchange Act of 1934, as amended, such options shall not arise until six months and one day after such termination of employment and all other time periods with respect thereto contained herein shall be adjusted accordingly. ARTICLE IV CERTAIN LIMITATIONS ON PURCHASES OF SHARES 4.1 Restrictions on the Company's Right and/or Obligation to Purchase Shares. Notwithstanding anything to the contrary contained herein, the Company: (x) shall have the right to exercise conditionally any option arising under Article III to purchase Shares; (y) shall not be obligated to purchase Shares; and (z) shall not be obligated to make payments with respect to the Purchase Price of Shares it has theretofore purchased; to the extent unconditional exercise of such option, the purchase of such Shares or the making of such a payment, when taken together with all other unconditional exercises of options by the Company, all other purchases by the Company of shares of its Common Stock and the making of all other payments by the Company on account of shares of its Common Stock which the Company has purchased either under these Terms and Conditions or under the Management Stockholders Agreement, would result in a violation of one of the Limitations (as herein defined). If this Section 4.1 is applicable, the following shall govern the exercises of such options and the making of such purchases and payments: (a) in the event the Company has an option to purchase Shares but, by virtue of the Limitations, is unable to purchase all Shares as to which it desires to exercise its option to purchase, it may unconditionally exercise its option as to the number of Shares which it may purchase without violation of the Limitations, and shall purchase those Shares on the Article III Closing Date, and may exercise said option as to the remaining Shares it desires to purchase conditioned upon its being able to do so without violation of the Limitations. In the event the Company is obligated to purchase Shares but is unable, by virtue of the Limitations, to pay the full amount which is payable by the Company on the Article III Closing Date with respect to the Shares which it is obligated to purchase, the Article III Closing shall take place with respect to the purchase of those Shares which the Company is able to purchase without violation of the Limitations; (b) with respect to those Shares which the Company was obligated, or conditionally exercised an option, to purchase but was unable, on the Article III Closing Date to purchase by virtue of the Limitations, the Article III Closing Date shall be extended with respect to such Shares by the period of such inability, but not in excess of one year from the date on which the Article III Closing Date would have occurred with respect to such Shares but for this Section 4.1. If said inability is cured in whole prior to the expiration of said one year period, the Article III Closing shall occur with respect to such Shares on the 30th day after the date on which the inability has been cured. If as of the end of said one year period the inability to purchase such Shares was cured in part, the Article III Closing shall take place with respect to the Shares as to which the inability was cured, on the 30th day after the expiration of said one-year period. If the Article III Closing Date is extended as to any Shares pursuant to this paragraph (b), the Purchase 25 Price of such Shares shall be computed as if the Article III Closing had occurred with respect to such Shares on the date set forth in Section 3.9, without regard to this Section 4.1 (the "Originally Scheduled Article III Closing Date"). The Purchase Price of such Shares, as so computed, shall be reduced by the amount of any cash dividends paid or declared and distributions made or delivered with respect to such Shares, during the period commencing on the Originally Scheduled Article III Closing Date and ending on the actual Article III Closing Date with respect to such Shares, and shall bear interest for the period commencing on the Originally Scheduled Article III Closing Date and ending on the actual Article III Closing Date, at the rate of interest which would be applicable under Section 3.6(b) if the Article III Closing had occurred with respect to such Shares on the Originally Scheduled Article III Closing Date, and shall be payable on the Article III Closing Date, and the rate of interest which is payable on the portion of the Purchase Price which is payable in installments pursuant to Section 3.6(b) or (c) shall be that rate of interest which would be applicable, by virtue of the application of the provisions of Section 3.6(b) or (c), on the actual Article III Closing Date. To the extent that after the expiration of said one year period, the Company remains unable to purchase any of the Shares which it is otherwise obligated to purchase or has conditionally exercised an option to purchase, the Company shall be relieved of the obligation which it was unable to fulfill, the Company's conditional exercise of its option to purchase such Shares shall terminate, and the Shares which the Company was otherwise obligated, or had conditionally exercised an option, to purchase shall thereafter remain subject to all applicable provisions hereof; (c) in applying the foregoing provisions of this Section 4.1, the Shares which are not Vested Shares shall be deemed to have been purchased or sold first; (d) if after the Article III Closing the Company is precluded from making all or any portion of an installment payment on account of the unpaid balance of the Purchase Price, the Company's obligation to make such payment (or portion thereof) shall be tolled until the earlier of the date on which it is no longer precluded from making such payment (or portion thereof) or the first anniversary of the date on which the payment (or portion thereof) was due. During the time in which the Company's obligation is so tolled, interest shall continue to accrue on the payment which was due but not made, but the holder of any note made by the Company which represents the unpaid portion of the Purchase Price of the Shares purchased by the Company shall not take any action to collect the payment due, or to accelerate the maturity of any payments not then due; (e) if after the expiration of the period of time in which the Company's obligation has been tolled pursuant to paragraph (d) the Company has not made the payment in full of the total amount then due, the holder of the note made by the Company shall have the right to foreclose the pledge of the Shares pledged by the Company, or draw against the letter of credit provided by the Company, as security therefor. If the holder does so, or takes other legal action to collect on the note, the holder's right to collect the amount owed by the Company to such holder (other than by way of foreclosure of the pledge of Shares pledged as collateral therefor or drawing on the letter of credit furnished by the Company in connection therewith) shall be subordinated to the Company's obligations under its then most junior subordinated debt and all debt which is senior thereto, and such holder's right to enforce its right to collect such amount shall be restricted to the extent of the maximum restriction contained in any of such debt with respect to such enforcement; provided, however, that notwithstanding any subordination provisions which may be contained in the instruments evidencing such debt, the holder of the note 26 shall be entitled to collect the amount owing from the Company on account of the purchase of the Shares to the extent that payment of the amount sought to be collected would not result in a violation of any provisions of the instruments evidencing any debt of the Company which is senior to the holder's note and which permit distributions by, and/or intercompany dividends to, the Company in connection with its repurchases of Shares. For the purposes of the immediately preceding sentence, references to the Company shall be deemed to include references to Ward; (f) if any of the Designated Management Optionees shall have exercised options to purchase any of the Shares which are subject to purchase under Article III, the Article III Closing shall nonetheless take place with respect to the Shares as to which said options have been exercised, and the provisions of this Section 4.1 shall have no effect on the Shares as to which such options have been exercised, or on the obligations of the Designated Management Optionees with respect to payment of the Purchase Price thereof. 4.2 Definition of the Limitations. The Limitations shall consist of the following: (a) any provision of the law of the Company's state of incorporation which restricts the Company's ability to repurchase its shares of Common Stock or restricts payments on account of the purchase price thereof; (b) any provision of any material contract to which the Company or any of its subsidiaries is a party (including, without limitation, loan agreements), and any provision of any Certificate of Incorporation of the Company or any of its subsidiaries, which would be violated by the Company's repurchase of its shares of Common Stock, the making of payments on account of the purchase price thereof, or the payment of intercompany dividends or other distributions or advances to the Company so that it can repurchase shares of its Common Stock or make payments on account of the purchase price thereof; and (c) the Cash Payments Limitation then in effect. 4.3 Cash Payments Limitation. Except as otherwise determined by the Board of Directors, the Cash Payments Limitation shall be determined with respect to each fiscal year of the Company, and shall be equal to the sum of $5,000,000 (increased by $2,000,000 per fiscal year after the Company's initial fiscal year) plus, with respect to a fiscal year, the aggregate proceeds, collected during said fiscal year, of any insurance on the life of a Management Shareholder whose shares of Common Stock are to be purchased pursuant to the Management Stockholders Agreement during said fiscal year. To the extent the Cash Payments Limitation restricts the aggregate amount which can be paid by the Company in a fiscal year with respect to repurchases of its shares of Common Stock, obligations of the Company to make payments for purchase of shares of its Common Stock (whether under these Terms and Conditions or the Management Stockholders Agreement) shall be honored in the order in which they arose. 27 ARTICLE V CORPORATE GOVERNANCE MATTERS 5.1 Voting of Shares Held by Participants. At any time in which this Article V of these Terms and Conditions is in effect and the Voting Trust Agreement is not in effect, and, in addition, with respect to any Shares which are owned by Participants or Permitted Transferees which for any reason are not subject to the provisions of the Voting Trust Agreement, on all matters requiring a vote of the Shareholders, all Shares held by Participants and Permitted Transferees shall be voted, (x) as long as Brennan is the owner of any shares of Common Stock and votes any of such shares, in the same manner that Brennan votes such shares of Common Stock with respect to that matter, and, (y) if Brennan is no longer the owner of any shares of Common Stock or if Brennan does not vote any of his shares of Common Stock, to effectuate the provisions of, and in accordance with the agreements contained in, this Article V. 5.2 Election of Directors. Subject to the limitations set forth herein, and in addition to any provisions relating to the election of directors by the holders of Preferred Stock which are contained in the Certificate of Incorporation and By-laws of the Company, at all times in which this Article V is in effect, the By-laws of the Company shall provide, and the Participants agree to vote, for the election of a Board of Directors consisting of nine members, five to be designated by the Designator and four to be designated by GE Capital. The Bylaws shall further provide, and the Participants agree, that, disregarding any directors which may be elected by the holders of Preferred Stock pursuant to the provisions of the Company's Certificate of Incorporation: (a) upon the occurrence of a Control Default, and provided that GE Capital has given written notice to the Company of the exercise of its rights under this paragraph (a), the number of members of the Board of Directors shall be expanded to eleven and the Participants shall vote for two nominees designated by GE Capital to fill the vacancies thereby created; (b) at such time, if any, as GE Capital and the GE Capital Affiliates shall cease to own, in the aggregate, more than 50% of the shares of Common Stock which GE Capital and the GE Capital Affiliates purchased on June 22, 1988, the number of members of the Board of Directors which the Designator shall have the right to designate shall be increased by one and the number of members of the Board of Directors which GE Capital shall have the right to designate shall be reduced by one; and (c) at such time, if any, as GE Capital and the GE Capital Affiliates shall cease to own, in the aggregate, 20% or more of the shares of Common Stock which GE Capital and the GE Capital Affiliates purchased on June 22, 1988, GE Capital shall no longer have the right to designate members of the Board of Directors in accordance with the foregoing provisions of this Section 5.2; and the number of directors to be elected shall be reduced to seven, five to be elected by the holders of Class A Shares, voting as a class, and two to be elected by the holders of Class B Common Stock, voting as a class; provided, however, that as long as that certain Account Purchase Agreement, dated as of June 24, 1988, between Ward and Montgomery Ward Credit Corporation shall be in effect and GE Capital or any GE Capital Affiliate shall own any shares of Class B Common Stock, GE Capital shall have the right to elect one of the two directors to be elected by the holders of Class B Common Stock. 28 In the event of a vacancy on the Board of Directors, the party who had the right to designate the director whose seat is vacant shall have the right to designate the party who shall fill the vacancy. The party who had the right to designate a director shall also have the right to cause that director to be removed. 5.3 Recapitalization. In connection with any public offering of Shares (other than pursuant to the Plan), the Company shall have a right to cause a recapitalization of the Company to occur, in order to facilitate such public offering. Any such recapitalization, as nearly as possible, shall put the parties in the same relative positions with respect to equity ownership and voting control of the Company in which they were prior to the recapitalization, after taking into account any dilution resulting from outstanding but unexercised Purchase Rights or Options under the Plan. Each of the Participants agrees to vote his or her Shares in favor of any recapitalization of the Company which meets the foregoing requirements, and to treat the shares of stock and other securities issued in such recapitalization as Shares under these Terms and Conditions. ARTICLE VI CONFIDENTIAL INFORMATION 6.1 No Disclosure of Confidential Information. In consideration of the issuance of Shares to him or her, each Participant individually covenants and agrees that during the time that he or she is employed by the Ward Group, and thereafter following the termination of his or her employment by the Ward Group for any reason whatsoever, he or she will not divulge to persons not employed by the Ward Group or use for his or her own benefit or the benefit of Persons not employed by the Ward Group, any Confidential Information. 6.2 Limitations on No Disclosure Covenant. For the purposes of Section 6.1: (a) information which is at any time Confidential Information shall cease to be such, and the Participant shall thereafter be under no obligations with respect thereto, at such time that: (i) it shall be disclosed by the Ward Group to the public; or (ii) it shall become known by the public other than by reason of the disclosure thereof in violation of applicable confidentiality agreements; and (b) notwithstanding the provisions thereof, nothing contained therein shall be construed to prohibit the Participant from making any disclosure of information, either to his legal counsel in connection with the defense of any claim, under these Terms and Conditions or otherwise, made by any member of the Ward Group, or in connection with the enforcement of any right, under these Terms and Conditions or otherwise, existing in favor of the Participant against any member of the Ward Group, or to any governmental agency to the extent the Participant is required by law to do so. 6.3 Return of Documents. Promptly on the termination of his or her employment with the Ward Group for any reason, each Participant (or in the event of his or her death, his or her personal representative) shall return to the Company any and all copies (whether prepared by such Participant or by any member of the Ward Group), of books, records, notes, materials, memoranda and other data 29 pertaining to Confidential Information which are in his or her possession or control at the time of termination of employment. Each Participant acknowledges that he or she does not have, nor can he or she acquire, any property rights or claims to any of such materials or the underlying data. 6.4 Enforcement. Each Participant agrees and acknowledges that his or her violation or breach of the covenants contained in this Article VI shall cause the Company irreparable injury and, in addition to any other right or remedy available to the Company at law or in equity, the Company shall be entitled to enforcement by court injunction. Notwithstanding the foregoing sentence, nothing herein shall be construed as prohibiting the Company from also pursuing any other rights, remedies or defenses, for such breach or threatened breach including receiving damages and attorney's fees. In addition to the foregoing, in the event of a breach or violation of this Article VI by a Participant which occurs after the Company and/or the Designated Management Optionees have purchased his or her Shares or the Shares of his or her Permitted Transferees pursuant to Article III, to the extent that the Purchase Price of the Shares purchased exceeds the Purchase Price which would have been paid if his or her employment with the Ward Group had been terminated for Cause by reason of a violation of Section 6.1, the Purchase Price shall be reduced to such latter amount, and if at the time the Purchase Price is so reduced the Participant and his or her Permitted Transferees shall have received payments on account of the Purchase Price which, in the aggregate, exceed the amount to which they would have been entitled by virtue of such reduction, they shall forthwith pay the difference to the purchasers of such Shares. The election of any remedy shall not be construed as a waiver on the part of the Company of any rights it might otherwise have at law or in equity. Said rights and remedies shall be cumulative. ARTICLE VII GENERAL MATTERS 7.1 Legend on Certificates. All certificates evidencing Shares (other than certificates of beneficial interest issued by the Voting Trustee under the Voting Trust Agreement) shall bear the following legend: "The sale, transfer and encumbrance of the shares represented by this Certificate are subject to certain Terms and Conditions agreed to by the Shareholder as of _________, 19__. A copy of said Terms and Conditions is on file in the office of the Secretary of the corporation. No sale or other transfer of the shares represented by this Certificate may be effected except pursuant to provisions of such Terms and Conditions. In addition, the right to vote the shares represented by this Certificate is restricted in the manner provided in said Terms and Conditions. The corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof authorized to be issued by the corporation and the qualifications, limitations or restrictions of such preferences and/or rights." Upon termination of these Terms and Conditions, certificates for Shares (other than certificates of beneficial interest issued by the Voting Trustee pursuant to the Voting Trust Agreement) may be surrendered to the Company in exchange for new certificates without the foregoing legend. 7.2 Termination and Amendment of Terms and Conditions. These Terms and Conditions shall be terminated: 30 (a) by the Company with the approval of the Board of Directors and with the written consent of the holders of not less than 66 2/3% of the Shares; (b) upon a sale by the Ward Group of all or substantially all of their aggregate assets (other than an intercompany sale within the Ward Group) to a single purchaser or a related group of purchasers in a single transaction or a related series of transactions; (c) upon a merger or consolidation of the Company as a result of which the aggregate percentage of ownership of the surviving or resulting entity by Management Shareholders, GE Capital and GE Capital Affiliates and persons who were GE Capital Affiliates at the time of purchase of shares of Common Stock is less than 50% of their aggregate percentage of ownership of the Company immediately prior to such merger or consolidation; or (d) upon a sale, to a single purchaser or a related group of purchasers, in a single transaction or a related series of transactions, of not less than 66 2/3% of the outstanding shares of each class of Common Stock of the Company. Termination of these Terms and Conditions shall not affect any rights or obligations which arose prior to termination, nor shall it terminate Article VI. Except as otherwise provided in the following sentence, these Terms and Conditions may be amended by the Company with the consent of the holders of not less than 66 2/3% of the outstanding Shares, but no such amendment shall adversely affect the method of valuation of any Participant's Shares for the purposes of Article III without his or her specific consent. As long as the Voting Trust Agreement is in effect, the Voting Trustee, and once the Voting Trust Agreement is no longer in effect, the Designator, shall have the power, as attorney in fact, to act for each of the Participants and each Permitted Transferee in connection with termination, or any amendment or restatement, of these Terms and Conditions which has been authorized by the holders of Shares as provided in this Section 7.2. Said power shall be deemed to be coupled with an interest and shall be irrevocable. Notwithstanding the foregoing, any amendment to provisions of Section 5.2 of the Management Stockholders Agreement which is adopted as provided in the Management Stockholders Agreement shall be deemed to constitute a corresponding amendment to comparable provisions of Section 5.2 of these Terms and Conditions, and, to the extent that there is any conflict between said sections, the terms of the Management Stockholders Agreement shall control. 7.3 Not an Employment Agreement. Nothing contained herein shall be deemed or construed as creating any agreement of employment between a Participant and any member of the Ward Group or a right of a Participant to employment by any member of the Ward Group. 7.4 Notices. All notices required hereunder shall be in writing and shall be deemed served when delivered personally to the person for whom intended or sent by confirmed facsimile, or two days after deposit in the United States Mail, certified mail, return receipt requested, addressed to the persons for whom intended at the following respective addresses: The Company: One Montgomery Ward Plaza Chicago, IL 60671-0042 Attention: President 31 The Designator: c/o The Company One Montgomery Ward Plaza Chicago, IL 60671-0042 Any Participant, or Permitted Transferee, as the case may be: at the last known address of said Participant or Permitted Transferee, as the case may be, as disclosed by the books and records of the Company; GE Capital: 260 Long Ridge Road Stamford, CT 06902 Attention: General Manager, Corporate Finance Group with a copy to: Associate General Counsel, Corporate Finance Group at the same address and/or to such other persons and/or at such other addresses as may be designated by written notice served in accordance with the provisions hereof. 7.5 Miscellaneous. The use of the singular or plural or masculine, feminine or neuter gender shall not be given an exclusionary meaning and, where applicable, shall be intended to include the appropriate number or gender, as the case may be. 7.6 Descriptive Headings. Title headings are for reference purposes only and shall have no interpretative effect. 7.7 Waivers. No action taken pursuant to any provisions herein, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action. The waiver by any party hereto of a breach of any provision of these Terms and Conditions shall not operate or be construed as waiver of any preceding or succeeding breach and no failure by any party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. The preceding sentence shall not apply to the failure of a party to exercise a specific option granted to that party pursuant to the terms hereof within the period of time provided herein. Any waiver shall be in writing, signed by the waiving party. 7.8 Binding Effect; Enforcement. These Terms and Conditions shall be binding upon and inure to the benefit of the parties hereto, their heirs, representatives, successors and permitted assigns. Each Participant and each of his or her Permitted Transferees agrees and acknowledges that its breach 32 of any of the provisions contained herein would cause irreparable injury and that monetary damages would be inadequate. Accordingly, each Participant and each of his or her Permitted Transferees agrees that, in addition to all other legal rights and remedies, the aggrieved party shall be entitled to specific performance of the rights granted to it hereunder. 7.9 Applicable Law. These Terms and Conditions shall be governed as to validity, construction and in all other respects by the internal laws of the State of Delaware. 7.10 Severability. The invalidity of any provision hereof or portion of a provision shall not affect the validity of any other provision or the remaining portion of the applicable provision. 7.11 Resolution of Certain Ambiguities and Conflicts. In the event of any ambiguity or conflict in these Terms and Conditions (i) with respect to whether any particular Shares constitute Vested Shares, (ii) the Percentage of Vesting applicable thereto, or (iii) the application of the provisions of Article III to any particular Participant and his or her Permitted Transferees, the ambiguity or conflict shall be resolved by the Designator in his sole discretion. 7.12 Authority to Give Consents, Approvals, etc. As long as the Voting Trust Agreement shall be in effect, any votes, approvals, waivers or consents of Shareholders whose Shares are subject to the Voting Trust Agreement shall be made by the Voting Trustee, rather than the beneficial owners of such Shares, except that for the purposes of Section 7.2(a), the beneficial owner of such Shares rather than the Voting Trustee, shall be the person to give such approval, waiver or consent. 33 IN WITNESS WHEREOF, the undersigned Participant agrees to and has executed these Terms and Conditions as of the ____ day of _______, 19__. PARTICIPANT: ----------------------------------------- signature ----------------------------------------- printed name ----------------------------------------- street address ----------------------------------------- city, state, zip code Accepted and agreed to: MONTGOMERY WARD HOLDING CORP. By: _______________________ 34 EX-10.(IV)(B)(I) 10 EX-10.(IV)(B)(I) EXHIBIT 10.(iv)(B)(i) MONTGOMERY WARD & CO., INCORPORATED EXECUTIVE LONG-TERM INCENTIVE PLAN PLAN DESIGN - ----------- The Plan generally consists of three-year cycles that can be initiated annually; however, in 1994 three cycles will be established--a one-year cycle ending in 1994, a two-year cycle ending in 1995 and a three-year cycle ending in 1996. The basis of payment from the Plan is the achievement of specific pre-tax earnings and return on equity objectives established by a compensation committee of the board of directors of Montgomery Ward Holding Corp. which is comprised solely of two or more outside directors ("Committee"). AWARDS - ------ The target Plan payout is a cash award based upon a percentage, determined by the Committee, of the base salary of each participant at the time of Plan payout but in no event shall such target Plan payout for any cycle for any participant exceed two million dollars ($2,000,000). Subject to the limitations and provisions set forth in this Plan, the target Plan payout will be paid if Montgomery Ward Holding Corp. and its subsidiaries ("Montgomery Ward") achieve the cycle objectives and the Committee certifies such achievement. To the extent the cycle objectives have not been met, the target Plan payouts will be proportionately reduced. The Committee may exercise its discretion to reduce the target Plan payout with respect to any Plan participant. The amount of the award for a cycle will be announced as soon after the Committee determines that the cycle objectives have been achieved as possible. The actual payout, however, will be made no later than March 15th of the year following the cycle. No award will be made unless the participant is on the last day of the last year of the applicable cycle the chief executive officer of Montgomery Ward or among the four highest compensated officers (other than the chief executive officer) as determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934, as amended. Without limiting the Committee's discretion set forth in the preceding paragraph, no award will be made if the Committee determines that the participant's conduct has been detrimental to Montgomery Ward. PARTICIPATION - ------------- Montgomery Ward executives in salary grades 28 and above are eligible to participate in the Plan but only those executives who meet the requirements set forth in the preceding section may receive an award under the Plan. Executives who are hired into the eligible participant group after the beginning of a cycle will have a target Plan payout prorated based on the proportion of the cycle objectives achieved from the beginning of the first quarter after their commencement of employment through the end of the cycle. SHAREHOLDER APPROVAL OF PLAN AND COMMITTEE ESTABLISHMENT OF OBJECTIVES - ------------------------------------- Payment of awards under this Plan is contingent on the material terms of this Plan being approved by a majority of the vote in a separate shareholder vote. Notwithstanding the preceding sentence, the Committee shall establish the specific pre-tax earnings and return on equity objectives for each cycle and certify whether such objectives have been met. INTERPRETATION - -------------- Awards under this Plan are intended to qualify as performance-based compensation described in section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended or any successor provision thereof and this Plan shall be interpreted consistent wih such intention. EX-10.(IV)(C)(I) 11 EX-10.(IV)(C)(I) Exhibit 10.(iv)(C)(i) MONTGOMERY WARD & CO., INCORPORATED SENIOR EXECUTIVE PERFORMANCE MANAGEMENT PROGRAM PLAN DESIGN - ----------- The Plan provides for annual incentive awards based on achievement of pre-tax earnings goals established by a compensation committee of the board of directors of Montgomery Ward Holding Corp. which is comprised solely of two or more outside directors ("Committee"). The pre-tax earnings goal for Montgomery Ward Holding Corp. and its subsidiaries ("Montgomery Ward") is expressed in terms of a minimum, target and maximum. The minimum goal represents a threshold of acceptable performance which must be achieved before any bonus award will be paid. The target goal represents a fully satisfactory performance for the bonus period. The maximum goal represents a stretch goal that the Committee believes can be obtained through superior performance. AWARDS - ------ Each Plan participant will be assigned by the Committee an annual incentive award target which will not be less than fifty thousand dollars ($50,000) nor more than two million dollars ($2,000,000). A Plan participant must achieve the minimum pre-tax earnings goal to receive any annual incentive award. Attainment of the minimum, target or maximum goal results in the opportunity to receive 50%, 100% or 150%, respectively, of the target award. Awards for attainment of more than the minimum goal but less than the target goal or for attainment of more than the target goal but less than the maximum goal are established by arithmetic interpolation. The Committee may exercise its discretion to reduce the Plan payout with respect to any Plan participant. Annual incentive award payments under this Plan will be made in March following the end of the year for which the award applies and after receipt of the outside auditor's report. The Committee will calculate bonus payouts in accordance with the provisions of the Plan and certify the achievement of the goals. No annual incentive award will be made under this Plan unless the participant is on the last day of the year to which the incentive award applies the chief executive officer of Montgomery Ward or among the four highest compensated officers (other than the chief executive officer) as determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934, as amended. Without limiting the Committee's discretion set forth in the preceding paragraph, no annual incentive award will be made if the Committee determines that the participant's conduct has been detrimental to Montgomery Ward. PARTICIPATION - ------------- Montgomery Ward executives in salary grades 28 and above are eligible to participate in the Plan but only those executives who meet the requirements set forth in the preceding section may receive an award under the Plan. Executives who are hired into the eligible participant group after the beginning of a year will have an annual incentive award target prorated based on the proportion of the pre-tax earnings goal achieved from the beginning of the first quarter after their commencement of employment through the end of the year. SHAREHOLDER APPROVAL OF PLAN AND COMMITTEE ESTABLISHMENT OF OBJECTIVES - ------------------------------------- Payment of awards under this Plan is contingent on the material terms of this Plan being approved by a majority of the vote in a separate shareholder vote. Notwithstanding the preceding sentence, the Committee shall establish the specific pre-tax earnings goal for each year and certify whether such goal has been met. INTERPRETATION - -------------- Awards under this Plan are intended to qualify as performance-based compensation described in section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended or any successor provision thereof and this Plan shall be interpreted consistent with such intention. EX-10.(XI)(A) 12 EX-10.(XI)(A) [MONTGOMERY WARD LETTERHEAD APPEARS HERE] Exhibit 10.(xi)(A) March 1, 1994 Richard Bergel 939 Suffield Terrace Northbrook, IL 60062 Dear Dick: This letter will confirm our agreements concerning your assignment as Chairman and CEO Lechmere, reporting directly to Bernie Brennan, Chairman & CEO, Montgomery Ward Holding Corporation. In your new position, you will continue to be Vice Chairman of Montgomery Ward and a Director of Montgomery Ward and Montgomery Ward Holding Corporation. Your compensation agreement will be: 1. Base salary will be $600,000 annually paid semi-monthly effective April 1, 1994. 2. Your short term target bonus will be $200,000 annually. For 1994, your target of $200,000 will be guaranteed. 3. Your long term bonus target will be 50% of your base salary. Your incentive will be determined using the Montgomery Ward Holding objectives. 4. You will receive stock options for 200,000 shares of Montgomery Ward Holding Stock at $22.50 per share. These options will vest on April 1, 1996 and will have a ten year duration from April 1, 1994. The granting of these options is subject to Shareholder approval of granting of options to a Director and the approval of the creation of additional options to the Stock Ownership Plan at the Stock Holders meeting. 5. You will receive a housing allowance of $3,000 per month to use for temporary living in the Boston area until April 1, 1996. The Company will gross up and pay your taxes of interim living allowance. 6. Upon your retirement, you will be permitted to sell back 25% of your shares of Montgomery Ward Holding for cash immediately and 25% for cash per year in each of the next three years following your retirement or, you may elect to hold your shares and not resell them to Montgomery Ward. If a public market is created for Montgomery Ward Holding stock prior to your retirement, this section will be modified to conform to [MONTGOMERY WARD LOGO APPEARS HERE] Richard Bergel March 1, 1994 Page Two normal S.E.C. regulations for such stock. 7. If your assignment at Lechmere ends before April 1, 1996 and you elect not to accept another assignment at Montgomery Ward or its subsidiaries or, if your reporting relationship to Bernie Brennan, Chairman and CEO Montgomery Ward Holding should change, then you may elect to retire immediately upon 30 days notice and receive the benefits in points 4 and 6. In this event, the stock options in Point 4 will immediately vest. Additionally, you will remain eligible for all bonus payments in accordance with the retirement provisions of the incentive plans. 8. The company will provide a 100% relocation package to move you from the Chicago area to a location of your choice in Continental United States in accordance with the Company's relocation plans. This section does not apply to your temporary assignment to Lechmere nor any interim living that may be necessary to that assignment. 9. You will retain all of your Montgomery Ward benefits and perquisites, including the Senior Officer Severance Plan. 10. In the event that there is a public offering of Montgomery Ward Holding Stock during the next two years and on dividends paid during the next two years, you will be "grossed-up" for state taxes in excess of 3% on your taxable gain for those years. If you are in agreement with this letter, please sign below and return a copy to me. Sincerely, Robert A. Kasenter Executive Vice President Human Resources /s/ Richard Bergel --------------------------------------- Richard Bergel --------------------------------------- Date cc: Bernie Brennan EX-23.(A) 13 EXHIBIT 23.(A) EXHIBIT 23(A) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Registration Statement. ARTHUR ANDERSEN & CO. Chicago, Illinois July 28, 1994. EX-24.(D) 14 EXHIBIT 24.(D) EXHIBIT 24.(D) MONTGOMERY WARD HOLDING CORP. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, BERNARD W. ANDREWS, a director of Montgomery Ward Holding Corp., a Delaware corporation (the "Corporation"), hereby constitutes and appoints JOHN L. WORKMAN, EDWIN G. POHLMANN, JEFFREY S. TORF and G. T. MORGAN, and each of them, his true and lawful attorney-in-fact and agent to execute in his name and capacity a post-effective amendment to the Registration Statement No. 33-33252 relating to the 3,000,000 shares of Class A Common Stock, Series 1 ($.01 Par Value) of the Corporation and Voting Trust Certificates representing 3,000,000 shares of Class A Common Stock, Series 1 ($.01 Par Value) of the Corporation and any further post-effective amendments and supplements to such Registration Statement, with all exhibits thereto, each of them with full power to act without the others; AND FURTHER, that the undersigned director of the Corporation hereby grants to said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things essential and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person in connection with the proper exercise of the powers granted hereunder. IN WITNESS WHEREOF, the undersigned as a director of said Montgomery Ward Holding Corp. has hereunto set my hand and seal as of this 26th day of July, 1994. NAME AND TITLE: /s/ Bernard W. Andrews ____________________________________ BERNARD W. ANDREWS, Director -----END PRIVACY-ENHANCED MESSAGE-----